Complementary Goods
- Complementary goods(Joint Demand) will have a negative cross elasticity of demand. For example, the direction of the price alteration and the quantity demanded of the complement will always be in the opposite directions. For example, if the price of petrol is increased (+), the demand for petrol is reduced (-) and the demand for cars is reduced(-). Petrol is a normal good so it has a negative PED. It is a necessity so it is price inelastic. (<1)
- The higher the coefficient in both of these cases, the stronger the cross-price relationship between the two products.
- Unrelated goods will have a cross elasticity of demand of zero.
Elasticity of Supply
Elasticity of supply measures the proportionate change in quantity supplied in response to a proportionate change in the price of the good.
Law of Supply
The Law of Supply states that as prices rise the quantity supplied will rise and vice versa. The law of supply is shown on the diagram below using an upward-sloping line from left to right. There is a positive relationship between the price of a good and the quantity supplied of that good. Ceteris paribus (All other things being equal).
- When PES >1, supply is price elastic following a change in demand.
- PES will usually be positive, since an increase it’s own price(+) will normally lead to an increase in quantity supplied (+).
- When PES <1, supply is inelastic
- When supply is 0, supply is perfectly inelastic( supply is fixed). The numerator is 0.
- Zero elasticity of supply would indicate that an increase in the selling price of the good does not result in an increase in supply.
- The more responsive is supply to a change in price, the greater will be the numerical measurement for the price elasticity of supply.
The circumstances which might give rise to such a situation would be the catch of fish, which is being sold for the best obtainable price and the supply for that particular day of the market cannot be increased even if higher prices are offered.
- When PES =Infinity, supply is perfectly elastic. This situation arises where no supply is available below a certain price but large increases in quantity supplied will not require an increase in price, an infinite quantity is available at the existing price.