PED & PES Notes .Pages

PRICE ELASTICITY OF DEMAND & PRICE ELASTICITY OF SUPPLY
Q. Explain what is meant by price elasticity of demand. [3]

Ans : The price elasticity of demand measures the responsiveness of changes in the quantity demanded to a given
price change.
The price elasticity of demand for a product is calculated as follows
% change in quantity demanded

PED = --------------------------------------
U % change in price
An example to show how Producer fixes the price for a product
The cost of a flat screen TV is Rs 20,000/ The producer slashes the price during a festival offer to Rs.18,000/ .
At the original price, his sales were 100 TV’s and after the price was slashed; his sales were 150Tv’s.
Find the PED
Use the formula as shown above
50
% change in quantity demanded= ---------X 100 = 50
100
2000
% change in price = ----------- X 100 =10
20,000
50
Price elasticity of demand = -------- = 5
10
In the price range Rs .20,000/ to Rs18,000/ the demand is elastic
Q. What are the determinants of PED or Factors affecting PED?
Factors which affect price elasticity of demand

• Number of substitutes
When consumers can choose between a large number of substitutes for a particular product, demand
for any one of them is likely to be price elastic.
Demand will be price inelastic when there are few substitutes .
• The proportion of income spent
Goods like matches or newspapers may be price inelastic in demand because they do not cost very
much and any rise in their price will only take a little bit of extra out of a person’s income. If the price of
cars was to rise by 10% this could mean paying an extra $500 or more for a car. This is a considerable part
of a person’s income. Demand is likely to be price elastic.
• Luxuries and necessities
Demand for necessities is inelastic because we cannot manage without them. The demand for
luxuries are said to be elastic because the amounts people buy will be very much influenced by their prices.
• Habit -forming goods
People can become addicted to certain products; tobacco and alcohol are obvious examples. Where
this is the case, demand will be inelastic. For addicts, such goods have no substitutes
• Period of time
If the price of a product rises consumers will search for cheaper substitutes. The longer they have
the more likely they are to find one. Demand will therefore be more price elastic in the long run.
Q. EXPLAIN VARIOUS TYPES OF PED?
There are 5 Types of PED:  
! !
Perfectly Elastic Demand Curve

• % Changes in Qty demand is not
at all influence by % changes in
Price
14
• e.g. 0% changes in price brings
10% changes in qty. demand. 12
•It is possible to get an answer of 10
infinity. 8 D
•This is called Perfectly elastic 6
demand 4
•What will happen to demand if price is 2

raised by any amount?
5 10 15 20 25 30
•Value : PED= ∞ Quantity
•Nature of Goods : Occasional /

Seasonal goods etc.
•Shape of DD Curve : Horizontal
straight line Curve
!
!
!
Q. Explain what is meant by price elasticity of supply. [3]
Ans : The price elasticity of Supply measures the responsiveness of changes in the quantity supplied to a given
price change.
The price elasticity of Supply for a product is calculated as follows
% change in quantity supplied

PED = --------------------------------------
U % change in price
What are the 5 Different Types of Elasticity of Supply? – Explained!

Different producers respond differently to a given change in the price of a commodity.
Elasticity of supply explains reactions of producers to a particular change in price.
There are five types of elasticity of supply:

(1) Perfectly Elastic Supply (Es =∞):
Supply of a commodity is said to be perfectly elastic, when the supply changes to any
extent irrespective of any change in its price. It means that at a price, any quantity of the
good can be supplied. But, at a slightly lower price, the firm will not sell at all. It is purely an
imaginary concept and can only be explained with the help of an imaginary supply
schedule.
In this case, the elasticity of supply is infinity and the supply curve is a straight line parallel
to the X-axis as shown in Fig. 3.8. Price remains OP irrespective of changes in supply. In
this case, a small rise in price evokes an indefinitely large increase in the amount supplied.
Further, a small drop in price would reduce the quantity, producers are willing to supply to
zero.
(2) Perfectly Inelastic Supply (Es=0):

Supply for a commodity is perfectly inelastic, if supply remains same irrespective of
change in price of the commodity. A perfectly inelastic supply curve is a straight line
parallel to the Y- axis as shown in Fig. 3.9. It is clear from the figure that in this case,
supply will not increase at all how so ever much price may rise.
The producers dump the produced quantity of a commodity for whatever it would bring.
Here, the price of the commodity depends upon the demand of the commodity. The higher
the demand, the higher will be the price.
(3) Unit Elastic Supply (Es =1):

Supply of a commodity is said to be unit elastic, if the percentage change in quantity
supplied is equal to the percentage change in price. Any straight line supply curve passing
through the origin has an elasticity of supply equal to unity (Fig. 3.10) irrespective of the
slope of this straight line and the scales of the two axis. But, it is important to realise that
unitary elasticity of supply unlike unitary elasticity of demand, has no special economic
significance.
(4) Relatively Elastic Supply (E s> 1):
When the percentage change in quantity supplied exceeds the percentage change in
price, supply of the commodity is said to be elastic or more than unit elastic (Fig. 3.11).
This type of supply curve passes through the price (Y) axis.
(5) Relatively Inelastic Supply (Es < 1):

When the percentage change in quantity supplied is less than the percentage change in
price, supply of the commodity is said to be inelastic or less than unit elastic (Fig. 3.12).
This type of supply curve passes through the quantity (X) axis.
Q. What are the determinants of PES or Factors affecting PES?
■ Barriers to entry. : High Barriers to entry inelastic Supply & Low barriers to entry elastic
Supply.
■ Resource Availability.: More resources available, Elastic Supply & Less resources available,
Inelastic Supply.
■ Inventory / Stocks: More stock available, Elastic Supply & Less stock available, Inelastic
Supply.
■ Technology used in production.: Labour Intensive technique used, Inelastic Supply &
Capital Intensive technique used, elastic Supply.
■ Time Period.: Longer time it takes to produce a goods, Inelastic supply, Lesser time it takes
to produce a goods, elastic supply.
■ Spare Capacity.: If the firm has more spare capacity to produce, elastic supply & If the firm
has spare capacity to produce or producing at full capacity, elastic supply

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PRICE ELASTICITY OF DEMAND & PRICE ELASTICITY OF SUPPLY

Q. Explain what is meant by price elasticity of demand. [3]

% change in quantity demanded

An example to show how Producer fixes the price for a product

Q. What are the determinants of PED or Factors affecting PED?

Factors which affect price elasticity of demand

Q. EXPLAIN VARIOUS TYPES OF PED?

There are 5 Types of PED:

Perfectly Elastic Demand Curve

•It is possible to get an answer of 10

•This is called Perfectly elastic 6

•What will happen to demand if price is 2

•Nature of Goods : Occasional /

% change in quantity supplied

What are the 5 Different Types of Elasticity of Supply? – Explained!

There are five types of elasticity of supply:

(2) Perfectly Inelastic Supply (Es=0):

(3) Unit Elastic Supply (Es =1):

(5) Relatively Inelastic Supply (Es < 1):

Q. What are the determinants of PES or Factors affecting PES?

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There are 5 Types of PED:  