PED - primary vs manufactured
If we look at the PED values for primary commodities and manufactured goods, we can see straight away that generally primary commodities have relatively low PED values (inelastic), while manufactured goods will tend to have higher values (more elastic).
So why is this? Well, if we look back at the determinants of the PED value that we looked at previously, we can start to identify why this might be the case. Let's remind ourselves first of the determinants of the PED value:
- The availability of close substitutes in the market. The more substitutes available the greater the elasticity.
- Is the good a luxury or necessity? Luxuries are more elastic in demand than necessities.
- Proportion of income spent on them. Cheap items tend to have an inelastic demand.
- Are they addictive? These obviously become price inelastic.
- The time period. Elasticity tends to increase with time.
- Number of uses
In the table below is a comparison of two products - wheat (a primary commodity) and laptops (a manufactured good) - against each of these determinants.
|Availability of close substitutes||Relatively few substitutes - effectively a necessity||Reasonable number of substitutes depending on precise task (e.g. games consoles etc.)|
|Luxury or necessity?||Necessity||Luxury|
|Proportion of income spent||Depends on nature of economy, but generally relatively low||Depends on nature of economy, but generally relatively high - a one-off purchase|
|Time period||Used over a short period - consumed immediately||Used over a long period|
|Number of uses||Single use - food||Multiple uses|
This helps us see why primary commodities will generally have a lower elasticity value than manufactured goods which will tend to be higher value luxuries rather than necessities and therefore more elastic.