PED&PES

If demand is relatively elastic
a small change in price cause relatively large change in demand
If demand is relatively inelastic
a small change in price cause only small change in demand

PED (Price Elasticity of Demand)

\text{PED} = \frac{\%\text{change in quantity demanded}}{\%\text{change in price}} = \frac{\Delta Q_{d}}{\Delta P}\times \frac{P_{0}}{Q_{d0}}
\%\text{change in quantity demanded} = \frac{\text{change in quantity}}{\text{original quantity}} \times \frac{1}{100}
\%\text{change in price} = \frac{\text{change in price}}{\text{original price}} \times \frac{1}{100}

[!def]
How responsive consumer demand is to a change in price, and therefore how revenues may respond following a change in price

[!def] Price elastic
A product will be price elastic if \ \text{PED} < -1

Example

Old fare $2, number of passengers 50, total revenue $125
New fare $2.5, number of passengers 30, total revenue $100
\%\text{change in price} = \frac{\$0.5}{\$2.00} = 25\%
\%\text{change in passenger numbers} = \frac{20}{50} = 40\%
\text{PED} = \frac{40\%}{25\%} = 1.6 > 1

PES (Price Elasticity of Demand)

\text{PES} = \frac{\%\text{change in quantity supplied}}{\%\text{change in price}} = \frac{\Delta Q_{s}}{\Delta P}\times \frac{P_{0}}{Q_{s0}}
\%\text{change in quantity supplied} = \frac{\text{change in quantity}}{\text{original quantity}} \times \frac{1}{100}
\%\text{change in price} = \frac{\text{change in price}}{\text{original price}} \times \frac{1}{100}

[!def]
How responsive supply is to a change in price, and therefore how revenues may respond following a change in price

[!def] Price elastic
A product will be price elastic if \ \text{PES} > 1

What affects PES

Time

[!def] short run
An amount of time that is less than the time needed for a firm to be able to expand and increase all the FOP.

Availability of resources

[!def] Price inelastic
if the economy is using most of its resources

[!def] Price elastic
large supply of unused or unemployed resources

Stock

If it’s hard to store, suppliers can’t increase supply in short run.