Predicting changes in price using PeD / PES

↑ DD  shortage  ↑ price If both demand and supply are unresponsive to changes in price, it will take a very ↑ in price to eliminate the shortage. Price S D D’ Qty / period P P’ Inelastic PED + PES LARGE When DD ↑

Price Qty / period d d’ s' P p' If both DD & SS are very responsive to changes in price, only a  in price is required to eliminate the shortage. elastic PED + PES small When DD ↑

Price S D D’ Qty / period d d’ s' P p' P’ Elastic d+s’ (P to p’) Inelastic D+S (P to P’) Comparing the 2 When DD ↑

 DD  surplus   price If both demand and supply are unresponsive to changes in price, it will take a very  in price to eliminate the surplus. Price S D’ D Qty / period P’ P Inelastic PED + PES LARGE When DD 

Price Qty / period d’ d s' P p' If both DD & SS are very responsive to changes in price, only a  in price is required to eliminate the surplus. elastic PED + PES small When DD 

Price S D’ D Qty / period d’ d s' P’ p' P Elastic d+s’ (P to p’) Inelastic D+S (P to P’) Comparing the 2 When DD 

When DD changes, price fluctuations will be very large if DD & SS are price inelastic, i.e. both crs & prs are very unresponsive to price changes. Hence in order to eliminate the shortage or surplus, price will have to  or  sharply.

Predicting changes in total revenue using PeD

Price S Di Qty / period De P Pe' Pi’ Inelastic DD vs elastic DD S’ Qe' Q Qi’ If | Ep | < 1,  price   TR & TE (Pi’ x Qi’) > (P x Q) If | Ep | > 1,  price   TR & TE (Pe’ x Qe’) < (P x Q)

Since DD for rice is price inelastic due to lack of close substitutes (Asians – staple food), esp. in SR   P  < proportionate  QD   TR Since total expenditure (TE) spent on rice by hhlds = amt. received by sellers = TR   TE

Price / unit S1 Quantity of oil output / period DI 0 DE P1 S2 S3 Q3 P2 P3 Q1 Q2 wide fluctuation in price with DI wide fluctuation in income negative relationship btw SS change & income change when PED < 1 ↑SS large ↓P↓TR ↓SS large ↑P ↑TR

Quantity of mineral product / period Price / unit SI D1 0 SE D3 D2 Q1 P1 Q2 Q3 P3 P2 wide fluctuation in price with SI wide fluctuation in income positive relationship btw DD change & income change regardless of PES ↑DD ↑P ↑TR ↓DD ↓P ↓TR

Prices & incomes (= TR) of primary producers fluctuate widely in the SR due to unplanned shifts in SS coupled with EP < 1 or cyclical fluctuations in DD coupled with ES < 1

 in absolute farm incomes over time Quantity / period S1 D1 Q1 P1 D2 S2 P2 Q2 A B E1 E2 C At equilibrium E1, TR = area A + C At new equilibrium E2, TR = area C + B Since area A > area B, farmers’ absolute incomes are now lower Price/unit

Ey of DD for agricultural products < Ey of DD for manufactured products  in absolute farm incomes but  incomes relative to producers of manufactured goods Quantity / period S1 D1 Q1 P1 D2 S2 P2 Q2 B E1 E2 Price/unit A

Prices & incomes (= TR) of primary producers  in absolute terms in the LR as SS  > DD . Even if absolute incomes do not , relative incomes (compared to incomes of manufacturers) will also  in the LR as EY of primary products (necessities) < EY of manufactured products (luxuries).

there is income disparity between LDCs & DCs LDCs seek to industrialise & develop their manufacturing sectors & reduce their dependence on agricultural products. Explains why...

Small countries like Singapore are usually price takers when it comes to buying or selling goods & services as the DD by such small countries (suppliers who import these products) account for an insignificant fraction of global DD  no influence on prices in world commodity markets  perfectly price elastic SS. ∴ as a price taker, prices which small countries pay fluctuate with world prices.

Initial price of copper is P1 Rapid industrial expansion in China   global DD for copper to D2  price  to P2 As price taker, SG now has to pay P2 for each unit of copper bought S D1 S1 P1 S2 P2 World market for copper S’pore as a price taker Price/unit Price/unit Quantity / period Quantity / period Q2 Q1 D2

WHO bears a greater burden? B4 tax – crs / prs (P1) After tax – crs (pay PC) – prs (receive PP) Consumer’s tax burden = New Pe – Old Pe = PC – P1 for each unit sold Producer’s tax burden = Tax per unit – crs’ burden = (PC – PP) – (PC – P1) = P1 – PP for each unit sold Price/unit Quantity/ Period PP S2 D S1 P1 Q1 Q2 PC b a DISTRIBUTION OF TAX BURDEN

DD more elastic than SS Crs’ tax burden per unit is PC – P1 which is less than the prs’ tax burden of P1 – PP per unit. Price/unit qty/t PP S1 DE S P1 Q1 Q2 PC DISTRIBUTION OF TAX BURDEN

DD less elastic than SS Price/unit qty/t PP S1 DI S P1 Q1 Q2 PC DISTRIBUTION OF TAX BURDEN Crs’ tax burden per unit is PC – P1 which is more than the prs’ tax burden of P1 – PP per unit.

DD more elastic than SS Crs’ subsidy enjoyment per unit is P1 – PC which is less than the prs’ subsidy enjoyment of PP – P1 per unit. Price/unit qty/t PP S DE S1 P1 Q1 Q2 PC DISTRIBUTION OF subsidy enjoyment

DD less elastic than SS Crs’ subsidy enjoyment per unit is P1 – PC which is more than the prs’ subsidy enjoyment of PP – P1 per unit. Price/unit qty/t PP S S1 P1 Q1 Q2 PC DISTRIBUTION OF subsidy enjoyment DI

Greater tax burden or subsidy enjoyment falls more heavily on the party who is less responsive to price change More inelastic DD relative to SS  more tax burden / more subsidy enjoyment on consumers as they are less responsive to price change

Effective cuz’ DD for public transport is price inelastic (lack of close substitutes)  a subsidy on public transport would result in a sharp ↓ in its price  substantial ↓ in TE on public transport (diagram next slide) In general, ineffective in encouraging public transport usage cuz’ it’s a poor subst. for travel by car (much more convenient & comfortable)

Price / unit S1 Quantity of public transport / period DI 0 DE P1 S2 P2 Q1 small ↑Q compared to elastic DD consumers also enjoy more subsidies compared to producers big ↓P compared to elastic DD

Improve trade balance Marshall-Lerner condition (PEDX + PEDM) > 1

Firms use different elasticity concepts to: Judge impact of pricing & non-pricing strategies & also impact of other firms’ decisions on their own firms – PED, XED Strategise to achieve certain goals like revenue maximisation – PED Plan what business areas to focus on given current state of economy – YED