Summary elasticity

PRICE ELASTICITY OF DEMAND
PED Responsiveness
:
of
quantity demanded toachangeinprice

=
-1.1in Qd

i. Ain P

Values

Elastic :PED > 1 Inelastic :PEDC1

PP=tQd more than AP -
-
told less than
T
-




q
- -

t
T
f
1-
. - -
i
proportionately ,
proportionately
I.
. . -




!
c-




Evaluate the determinants of PED
103 104
Determinants

Availability of •
Elastic -1> lftherearemanycletesubstitulesavaiable •


Depends onqualityot substitutes wiubereluctanttochange
-




Clotlsubstitutt tip :bQdmorethanpropasconsumerswiubuy cheaper substitutes itotlow quality -
consumers will payextratorhigher
•

Inelastic -1>
Hnotmanyclote substitutes are available quality than lower
tp-bQdlessthanprop.aslonsumershare.no other choice Depends upon brand loyalty somecensumersareloyaltoa
•
-




brand -


whltnebytoswitehevenifpricesihcreate

percentage of
•
Elastic -




Dlthighertiotincemeistauenup
•

trehithight.otinomeistanenupmay.ba
intense •
Inelastic iltnotmuchotincemeistaaenup
-


necessity good : -
stiudemanded




Nature of Elastica> luxury good subjective Different different goods
•
-

consumers see


good
•
Inelastic → necessity good as necessities Eg Chocolate , cigarettes
-
.




Time / Inertia •

Inelastic →
Evenifconsumerunewgooasatecheaper
•
Brand loyalty
elsewhere imaybetoolatylnetenoughtoswitch •
Don't always have substitutes available
Elastica overtime , gain information and switch

, Evaluate the usefulness of PED
to }

Can maximise revenue
P
[ elastic
•

PEDvatueshewswheretotalrerehueismaximirea.at
A-
} unit elastic where PED -1
-



-1 -




,
unit elastic
If PED elastic → prices should be decreased from PztoA=

!
•




M
7) inelastic
- - -
- - - - "




would cause amore than proportionate ↑inQDtromQt0⑨

\
'



p] - - t - -
-



t -
-

t

If PED is Inelastic → prices should be increased from BtoB
-



• =
"
"
! ! i would laureates than proportionate tin an trematodes
Q2 Qi Qs Q
•

Firms are able to maximise revenue asaiesult

Investment
P A •

If PED is elastic -'
tirmswiuhaveanihcentivetebe dynamically
A 52
Pi -
-




; is
efficient tinvettintortbsothattheycanbenetittromtos -i↓LRAC=
Pz -
- - -



i
- -
-
-


p
"
i D Wthlbeabletodllreate prices from Pinhas it is more profitable to supply
"
i : more Qb would 4 mere than
proportionately
-
-




0° Qi Q2 Q
4) ↑
revenue from area ORAQI to 0P2BQ2
P 52

s,
•



Investing into RTD -4 quality of good -
manes demand more inelastic =




R - - -
- -

TB
means prices canbeincreatedfnmpitotk Qb would only ↓ less than
-_



i.
p,
- - - - - -


f- ya
I
proportionately
1

1 i ☐ 4) ↑ revenue from area OKAQI to OPzBQ2
0 Qz QI Q



Effectiveness ottaxes
•

Point of implementing ataris to reduce overconsumption otgoodsthathave negative externalities
leg cigarettes
4) If PED is inelastic )
tax-tprice-Qbwoulaohtyt.IE/sthanpropeAienately--
implementing .
→


"


significant impact reducing
won't have any in Mamet failure as hardcore smoker "mU

remain inthemarhlt
•

Government are signalled heute alternative terms of intervention sutras information provision

Incorrect Mamet failure