Readers question: Also can you please explain the difference between elastic,inelastic and fixed supply

Elastic supply means that an increase in price causes a bigger % increase in supply. It has a PES of greater than 1.



Supply will be elastic if it is easy for a firm to increase supply e.g. spare capacity, easy to employ more factors of production

Inelastic supply. This means that an increase in price causes a smaller % increase in supply. It has a PES of less than 1



Supply is often inelastic in the short term, when it is difficult for firms to increase their capacity.

Fixed supply means that supply is not dependent on the price level. Whatever the price, the supply will remain the same. Supply is perfectly inelastic.

• Price Elasticity of supply

Labels: elasticity

Many firms such as: HMV, Top Shop, Virgin give students a 10% discount.

Is this discount an act of charity for poor students? Or is it a very clever strategy to increase profits?

The first thing to consider is the price elasticity of demand by students. Generally students have lower incomes, therefore, they are more sensitive to changes in price. Demand for CDs, and clothes are likely to be price elastic. This means a cut in price causes a bigger % increase in demand. If this is the case, a fall in price can increase a firm's revenue.

Diagram for Elastic Demand



However, the general market for CDs is likely to be more inelastic. - Working adults have more disposable income, therefore, they are less sensitive to reductions in price. If you reduced price for this group of consumers demand is likely to be inelastic, with only a small increase in demand.

Therefore, the best strategy for a firm is to cut prices for the student group (with elastic demand) but keep prices high for the other group.

This of course is an example of Price discrimination and is a way for firms to increase profits.

Cutting prices for students is also a good advertising strategy. It gives a reason to attract students into the shop, it may create brand loyalty over time. But, the main reason is due to the different elasticities of demand.

• The Economics of Coffee
• Price Elasticity of Demand

Labels: elasticity

Help With Elasticities.

Elasticity is an important concept in Economics. It is used throughout the A Level course and can be used in many different aspects.

These are a few suggestions for understanding Elasticity

Formula's

We always put Quantity on the top. and Price or income on the bottom. If you forget, imagine a QUeen standing on top of a Poor person. This will help you remember it is Quantity / price.

Price Elasticity of Demand PED

• PED = % change in Quantity Demanded / % change in Price

Cross Elasticity of Demand XED

• XED = % change in Quantity Demanded / % change in price of other good.

Income Elasticity of Demand YED

• YED = % change in Q.D / % change in income.

Price Elasticity of Supply

• PES = % change in Q.S / % change in Price.

• See How to Calculate a %

Question on Elasticity

If PED = - 0.5

If Price increases from 30 to 36.

If Quantity was 2,000. What is new Quantity

- 0.5 = % change in quantity demand / % change in price

% change in price = 6 (36-30) / 30 = 0.2 = 20%

Therefore

-0.5 = X / 20

Therefore X (% change in QD) = 20* -0.5 = - 10

Therefore new quantity = 2,000 * 10% = 1,800

• Price Elasticity of Demand

Labels: elasticity