π Understanding Price Elasticity of Demand
Price Elasticity of Demand (PED) measures how much the quantity demanded of a good changes when its price changes. Simply put, it tells us how sensitive consumers are to price fluctuations.
π Definition of Price Elasticity of Supply
Price Elasticity of Supply (PES) measures how much the quantity supplied of a good changes when its price changes. It indicates how responsive producers are to price changes.
π Key Differences: A Side-by-Side Comparison
| Feature |
Price Elasticity of Demand (PED) |
Price Elasticity of Supply (PES) |
| Definition |
Measures the responsiveness of quantity demanded to a change in price. |
Measures the responsiveness of quantity supplied to a change in price. |
| Focus |
Consumer behavior |
Producer behavior |
| Formula |
$PED = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}}$ |
$PES = \frac{\% \text{ Change in Quantity Supplied}}{\% \text{ Change in Price}}$ |
| Possible Values |
Elastic (PED > 1), Inelastic (PED < 1), Unit Elastic (PED = 1) |
Elastic (PES > 1), Inelastic (PES < 1), Unit Elastic (PES = 1) |
| Sign |
Usually negative (due to the inverse relationship between price and quantity demanded) |
Usually positive (due to the direct relationship between price and quantity supplied) |
| Factors Influencing |
Availability of substitutes, necessity of the good, time horizon |
Availability of resources, production capacity, time horizon |
| Example |
If the price of luxury cars increases, demand significantly decreases. |
If the price of wheat increases, farmers increase wheat production. |
π‘ Key Takeaways
- π PED focuses on consumers and how their buying habits change with price.
- π PES focuses on producers and how their production changes with price.
- β PED is often negative, while PES is typically positive.
- β° Both are influenced by factors like time and availability of alternatives.
- π° Understanding both helps in making informed economic decisions.