Professional Documents
Culture Documents
Revision Notes
Revision Notes
% change in price
If the answer using the above formula is less than 1 than the product has price
inelastic supply
however, if the answer is greater than 1 than the product has price elastic supply.
Price Elastic Supply: When supply changes by a greater percentage than the
change in price.
Price In Elastic Supply: When supply changes by a smaller percentage than the
change in price.
Labour:
Easily available Inelastic PES
% change in price
Price Elastic Demand: When demand changes by a greater percentage than the
changes in price.
Price Inelastic Demand: When demand changes by a smaller percentage than the
changes in price.
If demand is elastic, producers must charge low price in order to maximize revenue.
Nature Of Product:
Need (e.g. bread) PED will be inelastic
Complement: A product that is used in conjunction with another product. (cd player
and cd’s)
Advertising:
Successful advertising campaign of a product increases the demand of that product.
As it may bring the product into the notice of new customers and may encourage
existing customers to purchase more quantities of the product.
Changes In Population:
Weather:
Cost of Production:
Cost of production is the amount of money used in producing a good. It might
change due to the changes in the price of any of the factors of production (i.e. raw
materials)
Improvement in the Technology:
Use of latest technology in production would improve the productivity and hence
cost of production per unit would decrease and producers would be able to supply
more of that product.
Taxes:
Tax: a payment given to the government
Subsidies:
Subsidy: a payment given by the government, to encourage the production or
consumption of a product.
A subsidy given to a producer provides a financial incentive for them to supply more
as producers would have more capital to produce.
Weather Conditions:
They affect particularly agricultural products.
If the weather is good around harvest the supply of that crop would be more and
vice versa if the weather is bad around harvest the supply of that crop would be less.
Usefullness of Price Elasticity To Producers
Knowledge of Price Elasticity would help the producer in many ways while making a decision
such as:
Pricing Policy:
The knowledge of price elasticity might help a producer to analyze the impact of
changes in price levels on the demand for its product and consequently on its
revenue.
The producers can use this to decide the price of the product
If the demand of the product is price elastic, by lowering its price they would earn
greater revenue. If the demand of the product is price inelastic, by raising its price
they would earn greater revenue.
Indirect taxes:
Furthermore, the producers could use the knowledge of price elasticity of demand to
decide whether to bear high proportion of indirect taxes themselves or pass it on to
consumers in the form of high price.
Elastic demand: Producer’s beer high proportion of tax and charge low price.
Inelastic demand: Producer’s can pass a high proportion of tax in the form of high
prices to consumers.
Effect of subsidy:
Benefits of subsidy given by the government can also be analyzed by the price
elasticity of demand.
If the demand of the product is price elastic than the producers could get a greater
benefit of the subsidy given by the government.