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Basics
ECONS DD SS ELASTICITY
Definition of Demand
The different quantities of a good or
service that consumers are willing and
able to buy at various prices over a given
period of time, ceteris paribus.
Demand Factors
Price
of
related
goods
(Substitutes/Complements/Derived
Demand)
Taste
and
Preferences
(Advertisements/Fashionable/Promotions
)
Changes
in
Consumer
Income
(Normal/Inferior Good)
Demographics (Population/Age/Gender)
Changes in Expectations (Expected
income/prices/speculative demand)
Definition of Supply
The different quantities of a good or
service that producers are willing and
able to OFFER FOR SALE at various
prices over a period of time, ceteris
paribus.
Supply Factors
Cost of Production (raw materials, factor
of production, technology, efficiency)
Prices of related goods (Competitive
Supply, substitutes in production, joint
supply)
Number of Producers
Supply Shocks (Natural disasters, Climate
Change, Strikes)
Expectation Change by Producer (expect
price to rise, hold on to stocks)
PED Definition
Measures the degree of responsiveness
of quantity demanded to a change in pits
own price, ceteris paribus. (>1=price
elastic, <1=price inelastic)
PED Factors
Availability of Substitutes (number and
closeness, the more substitutes, more
price elastic)
Degree of Necessity (Basic/habit good,
more price inelastic)
Proportion of Income (Larger the
proportion, more price elastic. Smaller
JD SM CL A V2 HCI
ECONS DD SS ELASTICITY
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Introduction
Identify Market 1
ECONS DD SS ELASTICITY
Identify Market 2
(Complement/Substitute factors)
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ECONS DD SS ELASTICITY
Similar to Above
-Ceteris Paribus Assumption (Assumes no
other factors except own price, income and
price of related good changes when PED,
YED AND CED used. In real life, many
factors may be changing simultaneously.
For example when price of non-3G phones
fall, demand for non-3G subscription plans
unlikely to rise as phone users may be
changing to 4G smart phones)
Good 1 (Para 1)
JD SM CL A V2 HCI
Good 2 (Para 2)
Good 3 (Para 3)
Conclusion/Evaluation/Limitation
ECONS DD SS ELASTICITY
-Justify PED
-State final quantity drop
-Compare DD and SS and judge
equilibrium quantity change
-State you are talking about Income
Inelastic Goods (necessities)
-State what happens to demand when
income increases (increases less than
proportionately)
-Explain
-State quantity increases
-State what happens to supply when
GST increases
-Explain
-PED Statement
-PED explanation
-State quantity change
-State equilibrium quantity change
-State you are talking about luxury
goods (Income elastic)
-State what happens to demand when
income increases (increases more than
proportionately)
-Explain
-State quantity increases.
-State what happens to supply when
GST increases.
-PED STATEMENT
-PED explanation
-State quantity change
-State equilibrium quantity change
-Make a stand that Q definitelyfor
inferior goods, likelyfor necessities and
likelyfor luxury goods.
-One persons inferior good might be
anothers luxury.
-Ceteris Paribus might not hold. Multiple
factors affecting DD SS, Demographics
might have changed as well.
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ECONS DD SS ELASTICITY
revenues
-Increased profits if COST remains
constant
-Suppliers need to look at YED (output)
and PED (price)
Apply PED (Para 1)
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Limitations/Evaluation
ECONS DD SS ELASTICITY
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ECONS DD SS ELASTICITY
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ECONS DD SS ELASTICITY
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ECONS DD SS ELASTICITY
increases
with
a
more
than
proportionate increase in quantity)
-
JD SM CL A V2 HCI
ECONS DD SS ELASTICITY
GENERAL STRUCTURE
QUESTIONS
STEP 1
FIND AND IDENTIFY YOUR 3 MARKETS
DD + PES
SS + PED
and
FOR
DD
SS
+ELASTICITY
MARKET
JD SM CL A V2 HCI
ECONS DD SS ELASTICITY
CPPSE
DEFINE PED
WHETHER PRODUCT DEMAND
ELASTIC OR INELASTIC
EXPLAIN USING FACTOR SNIT
STATE WHAT HAPPENS TO
PRICE AND QUANTITY FOR THAT
SINGLE SUPPLY CHANGE
END OF EVERY DD AND SS POINT
COMBINED SHIFTS OF DD AND SS,
STATE
EQUILIBRIUM PRICE AND
EQUILIBRIUM QUANTITY AND MAKE
JUDGEMENT
IF
MARKET
IS
ON
BRING IN XED IN MIDDLE OF
COMPLEMENT/SUBSTITUTE
PARAGRAPH
EXPLAIN WHETHER VALUE LOW
OR VERY LOW/HIGH/VERY HIGH
(CLOSE/WEAK
SUBSTITUTES/COMPLEMENTS)
Evaluate WHY
XED price/quantity change (use
the
words
(more/less
proportionately)
ADDITIONAL POINTS IF THERE IS TIME
SHORT RUN VERSUS LONG RUN
EVALUATION
LIMITATIONS
2ND
Example of paragraph (N2008, market for MP3 player, a complement of digital
music)
Digital recorded music and MP3 players are close complements, as a person who wants
to listen to digital music would need a gadget like MP3 player or iPods to listen to it on the
go. Cross elasticity of demand measures the responsiveness of quantity demanded of a
particular good, given a change in price of another good, ceteris paribus. Thus cross
elasticity of demand of products like iPods and MP3 players that are capable to store the
digital recorded music with respect to prices of digital recorded music is possibility of
negative and of a high value. Thus, given the fall in prices of digital recorded music,
demand for MP3 players and iPods will increase more than proportionately, as MP3 or
JD SM CL A V2 HCI
ECONS DD SS ELASTICITY
iPods and digital recorded music are close complements to one another. Supply of MP3
player is price-elastic as the production period for such manufactured goods is short.
Hence, increase in demand in MP3 player along price-elastic supply will result in
increase in price and more than proportionate increase in quantity.
The advancement in technology in recent years has caused the unit cost of production for
these MP3 players to be lowered. The advancement in Nano-technology has enabled
producers of MP3 players to be able to produce players that capable of a larger memory
space and also a lower unit cost of production. Thus, producers of MP3 players are more
willing to produce and supply more MP3 players as it is profitable to do so. Thus, the
supply for music players like iPods and MP3 will rise from SS 3 to SS4. Demand of MP3
player is price-elastic as price of MP3 player could take up quite a significant proportion of
income for average consumers. Hence, increase in supply of MP3 player along priceelastic demand will result in decrease in price and more than proportionate increase in
quantity.
Therefore, with the increase in demand and increase in supply, equilibrium quantity of
MP3 players will definitely increase, but change in price is indeterminate.
The extent of shift of rise in demand for MP3 players would be smaller than that of
increase in supply of MP3 players, as there are other substitutes of storing the digital
music, like handphones. The equilibrium price will eventually fall from P3 to P4, with
equilibrium quantity rise from Q3 to Q4.
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ECONS DD SS ELASTICITY
However, the magnitude of cross elasticity of demand for MP3 players or iPods with
respect to digital recorded music may decrease over time. This is because, the
sophistication of technology have made it possible for consumers to be able to listen to
these digital recorded music on various other platforms like hand phones (iPhones) or
even on their laptops (iPads). Thus, with the availability of various other platforms to enjoy
digital music, the cross elasticity for demand for complementary music players like MP3
or iPods may not be significant. Thus, a given fall in price of digital recorded music will
result in a less than proportionate rise in the quantity demanded for these music players.
However, the demand for MP3 players will still increase from DD 3 to DD4 given a lower
price for digital recorded music.