ELASTICITY

Responsiveness of Demand

I D

Changes in Price Changes in prices

( Price Elasticity of demand of related
good
/ Cross
PED Elasticity
Changes in of Demand)
income [Income XED

Elasticity of Demand]
YED

Price Elasticity of Demand IPED)

↑
PXQDA
QDK
↳ by how much depende on PER

PED the of
measures
degree responsivenes in quantity
demanded of to in its
a
good the
changes price
.

PED= % D in QD
· D in Price

The result of this division process is a number that

can
range
from O to
infinity depending on the

responsivenes to
changes in price .
In a mixed economy, prices are still important in allocating scarce resources, but their role
is somewhat different compared to a market economy.

1. **Price Mechanism in Market Economy**:

- In a pure market economy, prices play a dominant role in resource allocation. Supply
and demand dynamics determine prices, which, in turn, allocate resources efficiently.
- Scarce resources are allocated based on consumers' willingness to pay, which reflects
their preferences and needs. High prices indicate high demand, encouraging resource
allocation to meet that demand.

2. **Mixed Economy and Government Intervention**:

- In a mixed economy, the government plays a more active role in resource allocation. It
can intervene to correct market failures and address societal goals.
- Government policies can include regulations, subsidies, taxes, and public provision of
goods and services. These policies can influence prices indirectly.

3. **Redistribution of Wealth and Resources**:

- In a mixed economy, there is often an emphasis on redistributing wealth and ensuring
equitable access to resources. This may involve price controls, such as price ceilings on
essential goods, to protect consumers.

4. **Public Goods and Externalities* *:

- Some goods and services have characteristics that make them unsuitable for pure
market allocation. Public goods and addressing negative externalities are common
examples. In such cases, prices alone may not efficiently allocate resources.

5. **Social and Environmental Considerations**:

- Mixed economies may prioritize social and environmental objectives alongside
economic ones. Regulations and taxes can be used to internalize external costs and
encourage sustainable resource use.

6. **Market Still Influences Decisions**:

- Even in mixed economies, market forces remain influential. Prices provide valuable
signals and incentives for businesses to allocate resources efficiently.

7. **Balancing Act**:
- In a mixed economy, the challenge is to strike a balance between the efficiency of
market-driven allocation and addressing social and environmental concerns.

In summary, while prices are still important in allocating scarce resources in a mixed
economy, their role is nuanced. Government intervention, regulations, and social
objectives may affect price signals and resource allocation, making it different from the
primarily price-driven allocation in a market economy.
 I
Price QD week
per

10 500
1000
9 2vvo

i
3550

4000
5000

6000
7500
Sop
9000

calculate PED an
price tale from

as $10 to $9
b) $3 to 9) 2
c) $2 to $1

Homework

a by 4)
x100
108
100 1000 X
-

stop
↳o * 100
1000
TON
x 100
↓x10
1000
-
= =
10
(very
elactic 14 .
283
S
12 .

-
30
33 3
.

=
- 0 .
25
0 42
Tinelastic) linelastic)
.
 Excercis : (Zumba , squats ,
lunges
-
A 5% increase in income has the following effect

Origina Demand New Demand Category of YED

Product units consumed) (units consumed with examples

Product A 100 & $18 115 @ 16 +3 normal good income

elastic e.g expensive

CAUS

product B 100 & $10 102 & $10 +0 4 %

normal good
income in elastic e.g rice

product 100 $10 94 & $10 - 1 .

2 inferior good
negative income elastin

e .

g public transport

4 s
-
new old
old

Note

A good has zero income

elasticity it there is a
change
in income brings in ad fore g
no
change
.
 Determinants Of YED
1 The level of income of consumers YED will differ when

changes in income occur blu different income group

for
e.g people in lower income
group witnessing a rise
in income will consume more meat etc

while people in high income group may have limited

response (income Mastic

② Nature of the good itself :

some goods loosely classified as 'luxuries' and add to
the comfort style and quality to life as income vise

people tend to consume more of such goods for eg in develop

income increases associated with
countries are
closely
increase in demand for exotic foreign holidays

Note :

An interesting Observation is that a demand for a

a good may have all three types of income

elasticity
for
as follows e
y potatoes
·

Od Of
pata to es
In a low income
economy as

income rises people consumes more potators

normal good + YED) As incomes continue to

rises people switch to other foods

Income
Questions

Identify industries that are

likely to be
A most effected

B not significantly effected

c facing a rise in demand

during times of recession
Crecession means
falling incomel

A ,
beauty parlour ,
automobile industry private
, heathcare ,

private education , Tourism

industry
Price Elasticity of Supply (PES)
Price elasticity of demand (PED) measures how sensitive the quantity demanded of a
product is to changes in its price. A lower (more inelastic) PED indicates that consumers
are less responsive to price changes. Here are three ways a firm can make the PED of its
product more price inelastic:

1. Necessity and Unique Products:

- Offer products that are perceived as necessities and have few substitutes. When a
product is considered essential and has limited alternatives, consumers are less likely to
reduce their consumption significantly in response to price increases. For example,
essential medical products or certain medications often have inelastic demand.

2. Product Differentiation:
- Create a unique product that distinguishes itself from competitors. When consumers
believe that a product is distinct and offers features or qualities that are not easily replaced
by alternatives, they are less likely to respond strongly to price changes. Strong branding,
exclusive features, and high-quality can contribute to making the product's demand less
elastic.

3. Targeted Marketing and Branding:

- Implement effective marketing and branding strategies to cultivate brand loyalty and
emotional attachment among consumers. When customers have a strong connection to a
brand, they may be more willing to continue purchasing the product even if the price
increases. Companies can achieve this through loyalty programs, endorsements, and
cultivating a positive brand image.

It's important to note that making the PED less elastic can often be challenging, and it's not
always a viable strategy for all products. Market conditions, competition, and consumer
behavior play significant roles in determining the price elasticity of demand. Additionally,
the ethical considerations of pricing strategies must be taken into account, as excessively
raising prices for essential products can be viewed negatively by consumers and may have
legal implications in some jurisdictions.