Ib Economics Notes Grade 11
Elasticities
Price elasticity of demand (PED)
Law of demand tells us that P goes up Q goes down or P goes down and Q goes up.
But it doesn’t give us any information about by how much Q changes compared to P.
We want to know, using the PED, whether Q is changing by a lot compared to P, by a little bit compared to P or by the same rate as P.
If %∆P<%∆Q, this good is called relatively elastic.
If %∆P>%∆Q, this good is called relatively inelastic.
If %∆P=%∆Q, this good is called unit elastic.
Determinants of the PED
->Things that tell us what the PED is originally.
1) availability of substitutes –the more substitutes a good has, the easier it is for consumers to switch products if the price changes
EX: if one brand of T-shirt is more expensive, choose another brand.
In other words, for T-shirts, a relatively small increase in price will lead to a large drop in the quantity of T-shirts demanded.
- If there are no easy substitutes, it will be inelastic demand.
EX: electricity->no easy substitutes->inelastic->a price change will lead to a relatively small change in Q. power generater
2) Broad definition vs. narrow definition
Ex: broad: fruit ->few substitute->inelastic
Narrow: green grapes (seedless)->very many substitutes (any kind of fruit) -> elastic
3) necessities vs. luxuries necessities ->no substitutes->inelastic
Luxuries->do not need them at all, so easy to avoid buying->elastic 4) length of time->short-term vs. long term short-term: no time to make changes or adjustments after a P change->inelastic long-term: time to adjust->more elastic
5) Proportion of Income-cheap vs. expensive cheap: low price as a % of income ->inelastic ex: pens expensive: high price goods as a % of income->elastic Ex: diamond rings
6) Addiction: people with addictions have inelastic demand
EX: stealing from your mother to pay for heroin because the price went up.
How to calculate and interpret PED
PED=(percent change in
Price elasticity of demand (PED)
Law of demand tells us that P goes up Q goes down or P goes down and Q goes up.
But it doesn’t give us any information about by how much Q changes compared to P.
We want to know, using the PED, whether Q is changing by a lot compared to P, by a little bit compared to P or by the same rate as P.
If %∆P<%∆Q, this good is called relatively elastic.
If %∆P>%∆Q, this good is called relatively inelastic.
If %∆P=%∆Q, this good is called unit elastic.
Determinants of the PED
->Things that tell us what the PED is originally.
1) availability of substitutes –the more substitutes a good has, the easier it is for consumers to switch products if the price changes
EX: if one brand of T-shirt is more expensive, choose another brand.
In other words, for T-shirts, a relatively small increase in price will lead to a large drop in the quantity of T-shirts demanded.
- If there are no easy substitutes, it will be inelastic demand.
EX: electricity->no easy substitutes->inelastic->a price change will lead to a relatively small change in Q. power generater
2) Broad definition vs. narrow definition
Ex: broad: fruit ->few substitute->inelastic
Narrow: green grapes (seedless)->very many substitutes (any kind of fruit) -> elastic
3) necessities vs. luxuries necessities ->no substitutes->inelastic
Luxuries->do not need them at all, so easy to avoid buying->elastic 4) length of time->short-term vs. long term short-term: no time to make changes or adjustments after a P change->inelastic long-term: time to adjust->more elastic
5) Proportion of Income-cheap vs. expensive cheap: low price as a % of income ->inelastic ex: pens expensive: high price goods as a % of income->elastic Ex: diamond rings
6) Addiction: people with addictions have inelastic demand
EX: stealing from your mother to pay for heroin because the price went up.
How to calculate and interpret PED
PED=(percent change in