Transcript Price Elasticity of Demand - Business-TES

Price Elasticity of
Supply
Can you…
Define and calculate it?
Describe what determines it?
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What is it
What shape is the Supply curve? Is it…
P
S2
S1
S3
Q
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Elasticity
The slope of the curve shows its elasticity*
It is calculated by:
% change in quantity Supplied
% change in price
*This is not strictly speaking true, but will do to start with.
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What is it?
It is “How responsive Supply is to a
change in price.”
SO, when price changes, does the amount
firms supply change by only a little or is it
by a lot?
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Interpreting our results
If you have an answer > 1, then Supply is
very sensitive to price, this means a small
BIG
change in price leads to a
change
in the amount that firms wish to supply
Supply is said to be PRICE ELASTIC.
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Interpreting our results
If you have an answer < 1, then supply is
very in-sensitive to price, this means a
BIG change in price leads to only a
small
change in the amount firms produce
Supply is said to be PRICE INELASTIC.
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Interpreting our results
If you have an answer = 1, then supply is
said to have unitary elasticity.
Price and supply change in the same
proportions.
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At the extremes
It is possible to get an answer of 0.
This is called Perfectly inelastic demand
What will happen to demand if price is
raised by any amount?
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At the extremes
It is possible to get an answer of infinity.
This is called Perfectly elastic Supply
What will happen to supply if price is
raised by any amount?
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Worked examples
Now, try the worked examples
from the worksheet.
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What makes Supply more elastic?
Availability of substitutes*
Time
*Take care with what you mean by ‘substitutes’ here.
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INCOME ELASTICITY of DEMAND
You know what PRICE elasticity of
demand is.
What do you think INCOME elasticity of
demand is?
What sort of goods are income elastic and
which are income inelastic
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Cross elasticity of demand
Shows how responsive demand for one
good is, when the price of another
changes.

% change in demand for good X
% change in price of good Y
This time whether the change is positive or
negative IS important.
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What our results show
If the answer is positive, then the goods
are SUBSTITUTES
The larger the answer then the closer
substitutes they are
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Interpreting our results
If the answer is negative then the two
goods are compliments.
The bigger the magnitude of the number,
then the stronger the link between them.
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Interpreting our results
The closer the answer is to zero, then the
weaker any link between the two is.
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Questions
One of the exam papers (P1) requires you
to answer multi choice style question.
This means we need to practice this!
Answer the questions on the multi choice
sheet.
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