-Price elasticity of demand measures the responsiveness of change in quantity demanded as a result of change in its price. It is NOT equivalent to the slope of the demand curve

-Price elasticity of supply measures the responsiveness of the change in quantity supplied due to a change in the price of the good concerned.

-1 : Demand is price elastic – a change in price leads to a more than proportional change in quantity demanded

- < 1 : Demand is price inelastic – a change in price leads to a less than proportional change in quantity demanded

 - = 0 : Demand is perfectly price inelastic – no change in quantity demanded in response to a change in price

-1 : Supply is price elastic – a change in price leads to a more than proportional change in quantity supplied

- < 1 : Supply is price inelastic – a change in price leads to a less than proportional change in quantity supplied

- = 0 : Supply is perfectly price inelastic – no change in quantity supplied in response to a change in price

--Determinants of Price Elasticity of Supply

-Degree of Necessity

-Availability of Substitutes

-Proportion of Income Spent on the Good

-Time Period for Consideration of Purchase

-The Number of Possible Substitutes’ Uses

-When demand for good is price inelastic, a firm selling the good should increase price to maximize total revenue.

-When demand for good is price elastic, a firm selling the good should lower price (therefore increase quantity sold) to maximize total revenue.

-In the long run, prices of factors of production will increase (due to inflation). Hence the cost for producing a good will increase and thus firms are unable to keep prices low.

-Elasticity concepts can help the government in implementing appropriate policies. Eg raise revenue through taxation, implement subsidies for certain goods, encourage/discourage consumption of certain goods.

-To Determine the Relationship of Goods

-To Help to Determine the Degree of Competition and Develop Nature of Competition

-It depicts the extent of change in quantity demanded and change in price of the good itself when there is a change in demand for the good. When there is an increase in demand for the good, the rise in price will be sharp and the reduction in quantity will be less than proportional than the rise in price if the supply is price-inelastic

-Magnitude of the value of PED and PES will vary as time span is longer.

-Ceteris paribus condition is not possible in reality, and thus, the complexity of the economic environment will affect the value PED and PES simultaneously.

-Social variables will distort the implication of the value of PED as the consumer with similar proportion of income spent on a  good will have different response to change in quantity demanded because of their family background

-If good to be taxed is low in PED and high in PES, the tax incidence is skewed towards the consumers and this will affect the consumer tax burden

-If goods have high PED and low PES, the tax incidence falls more on producers

-Under a price-inelastic supply, a decrease in such, will increase the price sharply as the increase in quantity supplied rises less than proportionately.

-Under a price-inelastic demand, an increase in such, will increase the price sharply as the increase in quantity demanded rises more than proportionately.

Marshall-Lerner Condition refers to the condition where an exchange rate devaluation or depreciation will only cause a balance of trade improvement if the absolute sum of the long-term export and import demand elasticities is greater than unity.

-In the short term, trade balance will worsen as demand is price inelastic. Imports become more expensive and exports become cheaper as a result.

-In the long term, trade balance will improve as demand becomes price elastic. Demand for imports falls while demand for exports raises consequently.

-When demand is price-inelastic, there is a greater consumer surplus because buyers are willing to pay a high price to continue consuming the product.

-When demand is price-elastic, there is low consumer surplus because buyers are less willing to pay to consume the product

-It explains why the price level will rise and fall sharply when there is a change in the demand and supply.

-It will also help to explain why the change in the quantity is greater if the demand and supply is price elastic as the consumers are able to respond to the change in the price level.

-It helps to determine the consumer and producer tax burden which will determine the cost of production and cost of living.

-When the demand is price-elastic, keeping prices low will result in a higher total revenue

-When demand is price-inelastic, keeping prices low will result in a lower total revenue

-When demand is price-inelastic, keeping prices high will result in a higher total revenue

-When the demand is price-elastic, keeping prices high will result in a lower total revenue

-When supply is price-inelastic, there is greater producer benefit because a rise in demand will result in a greater rise in price

PED =          Percentage change in quantity demanded

      Percentage change in the price of the good concerned

PES =          Percentage change in quantity supplied

      Percentage change in the price of the good concerned