Understanding Price Elasticity: Demand and Supply

Price Elasticity of Demand (PED) and Price Elasticity of Supply (PES) are important ideas in microeconomics. They help us see how the amount of stuff people want to buy or sell changes when prices go up or down.

What Are They?

• Price Elasticity of Demand (PED): This tells us how much the amount people want to buy changes when the price changes.

  • Here’s how we calculate it:
    $PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

• Price Elasticity of Supply (PES): This shows us how much the amount suppliers are willing to sell changes when the price changes.

  • We can calculate it like this:
    $PES = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$

Key Differences Between PED and PES:

1. How They Work Together:

   • For PED: If the price goes up, the amount people want to buy usually goes down.
   • For PES: If the price goes up, the amount suppliers want to sell usually goes up.

2. Elasticity Values:

   • For PED, if it's greater than 1, we call it elastic. This often applies to things like luxury items.
   • For PES, if it's greater than 1, we also call it elastic. This is common with products that are made, like cars.

3. What Influences Them:

   • For PED, things like whether there are substitutes or if the item is a necessity can change how much people buy.
   • For PES, how quickly something can be made and the availability of resources can affect how much suppliers sell.

By understanding these concepts, we better grasp how prices and supply affect what we buy and sell every day!