Ali Al Mahmoud 9B 23/1/2024

Exploring Price Elasticity of Demand (PED) and

Price Elasticity of Supply (PES)
 TASK 1:
PED, or Price Elasticity of Demand, measures how the quantity demanded adjusts in response
to changes in the price of a product or service. This concept proves vital for businesses and
governments, aiding them in foreseeing the impact of price shifts on product demand. For
instance, imagine you manage a computer manufacturing company. If the price of computers
increases, consumers might delay their purchases or explore alternative options. PED is
calculated using the formula:
% C h ange∈Quantity Demanded
% C h ange∈ Price

PES, or Price Elasticity of Supply, measures how the quantity supplied adapts to changes in the
price of a specific product or service. This tool is beneficial for businesses, helping them refine
pricing strategies for their products. To illustrate, consider an airline manager. If airfare
increases, the airline may swiftly increase the number of available seats to maximize revenue,
PES is calculated using the formula:
%Change∈Quantity Supplied
% Change ∈Price
 TASK 2:
Price Elasticity of Demand (PED) and Price Elasticity of Supply (PES) play a vital role in
practical scenarios. Examples include:

Gasoline: In the short term, people need gas, making the demand inelastic. Initially, gas supply
is also inelastic. Price hikes result in modest drops in demand, and it takes time for the supply to
adjust.

Luxury Goods: High-end electronics often exhibit elastic demand. Suppliers can promptly
adjust production (elastic supply), and prices can significantly impact demand. However,
suppliers can adapt quickly. Medicines have inelastic demand, and short-term supply can be
inflexible, affecting availability.

Public Transport: Demand is often inelastic for regular travelers, and short-term supply may be
inflexible due to fixed capacities.

Strategic Insights: Businesses utilize PED to set prices effectively.

Governments: PED aids governments in taxing inelastic goods more, as it won't hurt demand as
much. PES helps predict and prevent supply shortages during crises.

Market Competition: Understanding elasticity helps predict how competitors and consumers
respond to price changes.

 TASK 3:
For each PED and PES, there are factors that can influence their outcome, each of which can
affect them in different ways, for example in PED

Availability of Substitutes:
High availability of substitutes tends to increase PED. If consumers can easily switch to
alternatives, they are more responsive to price changes.

Necessity vs. Luxury:

Necessities often have lower PED because consumers need them regardless of price changes.
Luxuries, on the other hand, tend to have higher PED.

Time:
PED can vary over time. In the short run, consumers might be less responsive to price changes,
while in the long run, they may find alternatives or adjust their habits, leading to a higher PED.

Brand Loyalty:
Products with strong brand loyalty may have lower PED because consumers are less likely to
switch to alternatives even if prices change.

Coffee:
In the short term, coffee enthusiasts have an inelastic demand for their favourite brew. Initially,
the supply of specialty coffee beans might be inelastic. When prices rise, there may be a modest
decrease in demand, and it takes time for the supply chain to adjust.

while in PES

Time Frame for Production:

In the short term, producers may find it challenging to change their production levels, resulting
in less flexible supply. However, in the long run, producers can make adjustments more easily,
making the supply more flexible.
Availability of Resources:
When producers can easily obtain the materials they need, adjusting production becomes more
straightforward, leading to a more flexible supply.

Storage and Freshness:

If products have a long shelf life or don't spoil quickly, producers can adapt the supply more
easily based on market conditions.

Ease of Starting a Business:

In industries where it's easy for new businesses to start, the supply is more flexible because new
entrants can contribute to increased production.

Government Rules:
Government regulations can impact how easily producers can alter their production. Stringent
rules may limit flexibility.

 TASK 4:

Cross-Price Elasticity of Demand (XED) Explained Simply:

Cross-Price Elasticity of Demand (XED) helps us grasp how changes in the price of one product
influence the demand for another. There are three scenarios:

Substitutes (Positive XED):

Products are substitutes if a price increase in one leads to more demand for the other. For
instance, if the price of coffee rises, people might opt for more tea.

Complements (Negative XED):

Products are complements if a price increase in one decreases demand for the other. For
example, if smartphone prices go up, people may buy fewer phone cases.

Unrelated (Zero XED):

Products are unrelated if a price change in one doesn't affect the demand for the other. Consider
the price of salt changing; it's unlikely to impact the demand for bicycles.

Significance of XED:
-Assists businesses in setting prices and devising marketing strategies.
-Guides policymakers in foreseeing the effects of price changes on related goods.
-Aids investors in predicting how changes in prices might influence company performance.
-Overall, it serves as a tool for understanding consumer choices and how markets respond to
price shifts.

 TASK 5:

Situations Where PED and PES May Have Limitations:

Uniqueness of Goods:

-Limitation:
Elasticity concepts may not work well for unique products with no close alternatives. People
might purchase these items regardless of price changes.

-Necessities vs. Luxuries:

Limitation: For essential items like medicine or luxury goods for affluent consumers, elasticity
might not accurately reflect real-world behavior. Prices may not significantly alter buying habits.

-Information Availability:
Limitation: If people lack accurate information about prices or substitutes, elasticity predictions
may be inaccurate. Not everyone is aware of all available options.

-Brand Loyalty:
Limitation: Strong brand loyalty can influence consumer behavior, causing them to stick with a
particular brand even if prices change. This loyalty can disrupt elasticity predictions.

Arguments Supporting and Challenging the Use of Elasticity Concepts:

Supporting Elasticity Concepts:

Argument: Elasticity is valuable when consumers exhibit predictable behavior, aiding in

understanding how prices impact demand or supply.

Challenging Elasticity Concepts:

Counter-argument: In rapidly changing markets, elasticity might not be reliable. New products
and evolving preferences can disrupt predictions.

Supporting Elasticity for Policy Decisions:

Argument: Elasticity is crucial for policymaking, such as determining taxes or subsidies.
Understanding how people react to price changes is essential for policymakers.

Supporting Elasticity for Pricing Strategies:

Argument: Businesses can use elasticity to set prices and plan strategies for increased sales.
Lowering prices can attract more customers, especially when alternatives are available.

 TASK 6:

Simulations enhance understanding of economic principles by:

Real-world Application:
Simulations mirror real economic scenarios, offering a clear view of how decisions impact
outcomes.

Experimentation:
Users can actively experiment with various strategies and policies, learning from both successes
and failures.

Risk-Free Learning:
Simulations provide a secure environment to explore economic concepts without real-world
consequences.

Dynamic Feedback:
Immediate feedback in simulations reinforces cause-and-effect relationships in economics.

Experiential Learning:
Immersive simulations engage multiple senses, fostering a deeper grasp of economic principles.

Policy Analysis:
Simulations assist in analysing the effects of different economic policies before implementing
them in reality.

 TASK 7:

Case Study: QuantumStream Entertainment

Introduction:
QuantumStream Entertainment is a fictional tech company pioneering quantum computing
applications for immersive gaming and content streaming experiences. With a unique blend of
cutting-edge technology and entertainment, QuantumStream aims to revolutionize the gaming
and streaming industry. Let's analyse the market dynamics, business decisions, and potential
government interventions using the concepts of Price Elasticity of Demand (PED) and Price
Elasticity of Supply (PES).

Market Dynamics:
PED Analysis:
Scenario: The subscription price for QuantumStream's quantum-enhanced gaming and
streaming platform increases by 15%.
PED Calculation: PED = (% Change in Quantity Demanded / % Change in Price)
−30 %
PED = = -2
15 %

Interpretation: The absolute value of PED is 2, suggesting that QuantumStream's platform has
an elastic demand. Despite the price increase, the quantity demanded decreases, and consumers
are responsive to changes in price due to the multiple substitutes present in the gaming and
streaming community.

Business Decision: Given the elastic demand for QuantumStream's platform, the company might
consider strategically adjusting subscription prices to optimize revenue. However, caution is
warranted, as such a decision could have potential long-term consequences, with consumers
being more responsive to price changes and exploring alternative streaming services.

PES Analysis:

Scenario In response to heightened demand, QuantumStream invests in advanced infrastructure,

resulting in a 20% increase in streaming capacity.
PES Calculation: PES = (% Change in Quantity Supplied / % Change in Price)
20 %
PES = =∞
0%
Interpretation: The infinite PES signifies that QuantumStream's streaming capacity is perfectly
elastic in the short run. The company can swiftly adjust production without impacting
subscription prices.

Business Decision: QuantumStream can affectively meet the surge in demand without resorting
to a significant increase in subscription prices. This strategic approach aids in maintaining
market share and ensuring consumer satisfaction.
Government Intervention:

Internet Accessibility Scenario:

The government contemplates investing in enhanced internet infrastructure, specifically
benefiting high-tech entertainment companies like QuantumStream.

PED Impact: Improved internet accessibility may lead to an increase in the quantity demanded
for QuantumStream's platform, particularly in regions with limited access.

PES Impact: QuantumStream can leverage the improved infrastructure to enhance streaming
capacity, efficiently meeting increased demand without significant price adjustments.

Government Decision: The government's initiative aims to support the technology sector by
investing in internet infrastructure. However, considerations for unbiased access and market
competition should be carefully weighed.
Conclusion:
The case study of QuantumStream Entertainment demonstrates the practical application of PED
and PES in analysing market dynamics, guiding business decisions, and evaluating potential
government interventions. Understanding these elasticities is pivotal for companies in making
informed decisions, while governments must consider broader economic implications when
formulating policies.

SOURCES:
https://economics-games.com/games
https://www.aeaweb.org/
https://www.wsj.com/news/economics