- Created by: Tanya Haldipur
- Created on: 26-01-14 15:04
Factors that determine PeD
- The availability of substitutes - with lots of substitutes the demand curve will be relatively elastic because if the price increases for one brand, they can easily move to another. (VV)
- Time - if consumers require the product immediately or in the near future they may have to withstand a higher price so demand is fairly inelastic in the SHORT TERM.
- A luxury or necessity - demand is likely to be more elastic for luxury items than necessities due to opportunity cost.
- The proportion of income spent on a good - low priced goods e.g. matches take up little of an income. If their prices rise, demand won't change much as they make little difference to our standards of living. However, more expensive items take up a larger proportion of income so demand is more elastic as the OC is greater. (this varies due to varying incomes)
Price elasticity and the incidence of tax
- Incidence of tax - the proportion of tax that is passed onto the consumer. If most of a tax rise is added to the consumer then the incidence of tax is 'high'. When demand is price INELASTIC then the incidence of tax tends to be high.
The effect of taxes on: (shown by the vertical drop between the supply curves,under the demand c)
- price - firms increase prices to make up for lost revenue from taxation. However, when demand is ELASTIC, this is hard as it can cause a large fall in demand.
- the fall in quantity sold - higher costs of production - higher prices - lower demand (if elastic)
- tax revenues - higher prices, lower demand so less total govt. tax revenue (if elastic) therefore, govts. are often less keen to tax elastic demand products.
- employment - Taxes on price ELASTIC products can cause employment in those markets to fall as quantity demanded would fall. Labour is 'derived demand' so a fall in demand for the product will mean fall in demand for labour.
- equilibrium price and quantity of output - a subsidy on products that are demand INELASTIC causes relatively bigger falls in price and small increases in quantity.
Income elasticity of demand and cross price elasti
Income elasticity of demand
- Answers above 1 - demand is income elastic (normal good)
- Answers between 0 and 1 - demand is relatively income inelastic.
- Below 0 - income inelastic, demand falls when income rises (inferior good)
- In times of rapid growth in an economy, average income are higher so demand for income elastic products e.g. holidays etc may rise at a faster rate than income and employment may grow. (in recession, these markets will be affected the most)
Cross price elasticity of demand (Xped)
- above 1 - relatively cross price elastic
- between 0 and 1 - cross price inelastic
- positive answers show that the goods are substitutes (the higher it is the closer they are)
- negative answers show that the goods are complementary.
Price elasticity of supply PeS
- answers below 1 - price inelastic supply
- answers above 1 - price elastic
Factors affecting PeS:
- time - some goods take time to produce so in the short term, it cannot meet additional demand e.g. agricultural products that are seasonal.
- Supply of raw materials - oftern price inelastic as mining firms need to find new resources before increasing supply. (links to time)
- The availability of stocks - firms with stocks of goods are likely to be more elastic in the short term as they can react quickly to changes in demand.
- The ease of switching between alternative production - if firms can switch to making other goods easily they can expand production if prices rise
- The availability of spare capacity - these firms can expand output quickly in response to price changes. Firms at full capacity would finhd this difficult.
- The number of firms in the market and ease with which firms can enter a market
- The ability to alter production methods
*perfectly inelastic supply curves: supply cannot increase even when price rises (especially in short term) e.g. road space, building land etc.