PED - primary vs manufactured goodsSyllabus: Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high.
Generally primary commodities have relatively low PED values (inelastic), while manufactured goods will tend to have higher values (more elastic).
So why is this? Remember the determinants of PED?
- 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|
|Addictive||N/A||N/A (Unless you are a gamer?)
|Time period||Used over a short period - consumed immediately||Used continously over a long period|
|Number of uses||Single use - food||Multiple uses - writing, searching, gaming...
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.