Price elasticity of demand (PED):

change in quantity per change in price, in percentage, always positive: percentage good for: comparing across different countries/units, shows more context.

levels of elacsticity: <1: relatively unresponsive : >1: relatively responsive =1: unit elastic =0: perfectly inelastic = infinity: perfectly elastic, will buy anything.

Elasticity is naturally higher at points above price=quantity. this is due to the nature of how PED is calculated, and how a shift in smaller quantities affects the overall percentage at a larger scale.

Determinants of PED:

• Substitutes: Number and closeness of substitutes, more elastic.
• Necessities vs luxuries: necessities are more inelastic, since you cant just not need needs.
• Length of time spent thinking about the purchase
• Portion of income spent on the good.

Total revenue: Price x Quantity

Effects of PED on total revenue:

• If demand is elastic, increase in price causes fall in total revenue, while decrease in price causes increase in total revenue.
• If demand is inelastic, increase in price causes increase in revenue, while decrease in price causes decrease in total revenue. Revenue is at a maximum when PED is unit elastic. Primary commodities: goods arising from the use of natural resources. They have lower PEDS.

In some cases, a poor supplying producer can generate higher profits, while good supplying producers decreases total revenue.

Government taxes: Government imposes indirect taxes to goods that are more inelastic. this is because the tax will decrease supply, but will not affect price/total revenue as much.

Cross Price elasticity of Demand

(Percent change in demand for good x) / (percent change in price for good y) = xed. if xed > 0, y and x are substitutes. Larger the absolute value of the xed, the stronger the substitution. if xed < 0, y and x are compliments, like tennis balls and tennis rackets. larger the absolute value, more they are compliments. of xed = 0, x and y are unrelated. Substitutes produces by the same company: Sometimes, same company produces a line of products. Changing the price of one may negatively affect the other, so it is important to examine the PED of the products, and how much each is affected. Substitutes produced by rivals: Knowing the xed between rivals, businesses can understand the impacts and advantages they may gain from dropping or increasing their prices. How much people will flock away? Mergers between firms: Merging is beneficial between firms when XED is really high and positive. It reduces competition between the two firms

Income elasticity of demand

YED: percentage change in quantity demanded / percentage change in income Yed>0: normal good yed<0: inferior good. Most goods are normal. If yed > 0 && < 1, it is income inelastic, more of a luxury. if > 1, more of a luxury. Applications:

• Industry growth: In an economy that is growing, income elastic goods and industries grow, since an x% increase in average national income yields a >x% growth in the demand.
• Contrastingly applies to economic recessions. Inferior goods, which have YED < 0, will even experience increase in sales during recession.

Price Elasticity of Supply

Formulas and definitions similar to PED. Only possible to compare between two curves, (supply OR demand), when there is intersection of points between the two.

Determinants of PES

• Length of time to respond to change in prices: Bigger the length of time, more elastic the supply.
• Mobility of factors of production: movement if factories to envionrnments where prices are increasing, causes higher pes.
• Ability to store stocks: More stocks that are abled to store, higher PES.

Primary commodities vs manufactured products (PES comparison): Primary commodities have lower pes because it takes a long time for them to respond. New irrigation systems, planting practices, things like that. Consequences: Depending on slope of demand, the supply fluctuation can change the equilibrium price by lots.