Price Elasticity of demand REVIEW 2.5 Price Elasticity of demand

PED measures how responsive demand is to a change in price, e.g. % change in quantity demanded %change in price Example 1 20% / 10 % = 2 = Elastic Example 2 10% / 20 % = 0.5 = Inelastic Example 3 10% / 10% - 1 = Unitary

Factors that influence PED SUBSTITUTES - Lots of = elastic / few or none = inelastic LUXURIES & NECESSITIES - Luxuries = elastic/ necessities = inelastic PERCENTAGE OF INCOME SPENT ON A GOOD – Large income spent= elastic / small income = inelastic HABIT FORMING GOODS – e.g cigarettes = inelastic TIME – everything becomes more elastic as time goes on. Inelastic – The QD changes at a lesser rate the price. Elastic - The QD changes at a greater rate then price.

PAST PAPER QUESTIONS 2011 – 2A (2) 2010 – 2 (2)

REVIEW 2.6 SUPPLY

Contraction and Extension of supply CONTRACTION - The fall in supply due to a fall in price. EXTENSION - The increase in supply due to a rise in price.

When the supply curve shifts to the right there is an increase in supply. When the supply curve shifts to the left there is a decrease in supply.

FACTORS WHICH EFFECT SUPPLY PRODUCTIVITY – Increase = right shift INDIRECT TAXES INCREASE - Decrease = left shift NUMBER OF FIRMS ENTERING A MARKET – Increase = overall right shift TECHNOLOGY- Increase – right shift SUBSIDIES – Increase – right shift WEATHER (POOR FOR CROPS) = left shift COSTS OF PRODUCTION INCREASE – left shift