What this lesson teaches
I can use price, income and cross elasticities to judge how large those changes will be.
Syllabus 9570, 2.1.2(g). Demand and Supply Analysis and its Applications: These outcomes can be affected by price elasticities of demand and supply, income and cross elasticities of demand
Make a guess
A stadium holds 50,000 seats. A famous band's demand for tickets doubles after a viral video. What happens to the number of tickets sold?
- It rises a little, as the organiser adds seats.
- It stays at 50,000; the price rises instead.
- It doubles to 100,000, matching the rise in demand.
Show the answer
It stays at 50,000; the price rises instead.
Supply is fixed, so it is perfectly inelastic. A rise in demand cannot raise quantity, so the whole effect shows up in the price.
YED and XED predict the shift in demand; supply decides how much of it becomes more sales or higher prices.
YED and XED tell you how much demand shifts at the current price. They do not tell you the final change in quantity sold.
After demand shifts, there is a shortage or surplus at the old price, and the price adjusts. How much of the shift turns into extra sales depends on PES.
If supply is perfectly inelastic in the short run, for example a fixed number of hotel rooms during a major event, a rise in demand only raises the price. Sales cannot rise at all.
So to forecast sales, combine the demand elasticity with what you know about supply.
- YED and XED
- Give the shift at the old price.
- Final sales
- Depend on supply and price adjustment.
Worked example: Why an 8% rise in demand need not mean 8% more sales
At $10, 100 hotel rooms are booked and 100 are available. Incomes rise, and YED tells us demand at $10 rises by 8% to 108 rooms. Only 100 rooms exist this week.
- At $10, there is now a shortage of 8 rooms.
- The hotel raises its room rate until only 100 rooms are wanted.
- Rooms sold stay at 100; the whole effect is on price.
- Over time, new hotels may be built, and then sales can rise.
Watch out for this
If YED predicts demand rises 8%, sales will rise 8%.
The 8% is the shift at the old price. Actual sales depend on how supply responds as the price changes.
Check your understanding
A concert hall with 2,000 seats sells out at $80 a ticket. A famous singer is added and demand doubles. What should the organiser expect if it keeps the price at $80?
- A shortage: far more fans want tickets at $80 than there are seats.
- The same sales and no queue, because supply is fixed at 2,000 seats.
- Twice as many tickets sold, because demand has doubled at the same price.
Show the answer
A shortage: far more fans want tickets at $80 than there are seats.
Right. Supply is fixed at 2,000 seats, so at the old price quantity demanded is far above quantity supplied. Queues and resale follow unless the price rises.