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───▄▀▀▀▄▄▄▄▄▄▄▀▀▀▄─── ───█▒▒░░░░░░░░░▒▒█─── ────█░░█░░░░░█░░█──── ─▄▄──█░░░▀█▀░░░█──▄▄─ █░░█─▀▄░░░░░░░▄▀─█░░█ █▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀█ █░░╦─╦╔╗╦─╔╗╔╗╔╦╗╔╗░░█ █░░║║║╠─║─║─║║║║║╠─░░█ █░░╚╩╝╚╝╚╝╚╝╚╝╩─╩╚╝░░█ █▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄█  : Presillyn Tan Jie Yin, Fairview International School . recent update :
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Price Elasticity of Supply and Demand
written by Presillyn Tan ✈
Price Elasticity of Supply
and Demand
Elasticity is an
important concept in economics. It is frequently used to describe the
responsiveness of quantity demanded or supplied to price. Figure 1 shows the
typical elasticity of demand curve. The price elasticity of demand (Ed)
measures the percentage change in quantity demanded over the percentage change
in price. The information derived from price elasticity of demand is very
important because it tells us how quantity demanded responds to a change in
price. For example, if the price elasticity of demand for iPhone 5 is 0.2, this
implies that a 10% rise in iPhone 5 price will lead to a 2% fall in quantity
demanded. Consumers shift their demand to other substitutable products which
price are lower than iPhone like Samsung, Sony, HTC and so on. Thus, the larger
the value of price elasticity, the larger the quantity responds to any price
changes. As shown in Figure 1, there is various degree of price elasticity
along the demand curve and the descriptions are listed below:
(a)
Perfectly elastic (Ed = ∞) – Quantity demanded
changes by a huge percentage in response to zero percentage changes in price.
(b)
Elastic (Ed > 1) – Percentage
change in quantity demanded is greater than percentage change in price.
(c)
Unit elastic (Ed = 1) – Percentage
change in quantity demanded is same with the percentage change in price.
(d)
Inelastic (Ed < 1) – Percentage
change in quantity demanded is smaller than percentage change in price.
(e)
Perfectly inelastic ((Ed = 0) –
Quantity demanded remains constant as the price changes.
Figure 2: Elasticity of Supply
Figure 2 shows the
elasticity of supply curve. The price elasticity of supply (Es)
measures the percentage change in quantity supplied over the percentage change
in price. Similar to price elasticity of demand, the information derived from elasticity
of supply is very informative since it measures how the quantity supplied
responds to a change in price. For example, if the price elasticity of supply
for iPhone 5 is 0.6, this implies that a 10% rise in iPhone 5 price will bring
about 6% increase in quantity of iPhone 5 supplied. Overall, the larger the
value of price elasticity of supply, the larger the quantity responds to any
price changes. The descriptions on various degree of price elasticity along the
supply curve are listed below:
(a)
Perfectly elastic (Es = ∞) – Quantity supplied
changes by a huge percentage in response to zero percentage changes in price.
(b)
Elastic (Es > 1) – Percentage
change in quantity supplied is greater than percentage change in price.
(c)
Unit elastic (Es = 1) – Percentage
change in quantity supplied is same with the percentage change in price.
(d)
Inelastic (Es < 1) – Percentage
change in quantity supplied is smaller than percentage change in price.
(e)
Perfectly inelastic ((Es = 0) –
Quantity supplied remains constant as the price changes.
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