3. Elasticity

What does price elasticity of demand mean?

The responsiveness of demand to a change in price

What is the formula for price elasticity of demand?

PED = % change in quantity / % change in price

What does the price elasticity of demand show?

• PED > 1 → elastic demand → demand is very responsive to a change in price

• PED = 1 → unitary elasticity → demand is proportionally responsive to a change in price

• PED < 1 → inelastic demand → demand is not responsive to a change in price

What are the graphs for different price elasticities of demand?

• Perfectly elastic demand - straight horizontal line

• Unitary elasticity - reciprocal curve

• Perfectly inelastic demand - straight vertical line

What is the formula for revenue?

Revenue = price per unit x quantity

What four factors influence the price elasticity of demand?

• Is the good a necessity?

• Is the habit forming?

• Number of substitutes

• Level of brand loyalty

What does price elasticity of supply mean?

The responsiveness of supply to a change in price

What is the formula for price elasticity of supply?

PES = % change in quantity / % change in price

What are the graphs for different price elasticities of supply?

• Perfectly elastic supply- straight horizontal line

• Perfectly inelastic supply - straight vertical line

How does price elasticity of supply differ at different time lengths?

• Very short run - perfectly inelastic supply

• Short run - relatively inelastic supply

• Long run - relatively elastic supply

What goods/services usually have a elastic/inelastic price elasticity of supply?

• Elastic → manufactured goods

• Inelastic → commodities/crops

What four factors influence the price elasticity of supply?

• Amount of excess

• Level of stock

• Access to labour

• Access to capital

What does income elasticity of demand mean?

The responsiveness of demand to a change in income

What is the formula for income elasticity of demand?

YED = % change in quantity / % change in income

What does the income elasticity of demand show?

• YED > 1 → Normal good, luxury, income elastic

• YED = 1 → Normal good, unitary elasticity

• 0 < YED < 1 → Normal good, necessity, income inelastic

• Negative YED → inferior good

What does cross elasticity of demand mean?

The responsiveness of demand for one product to a change in price for another product

What is the formula for cross elasticity of demand?

XED = % change in quantity demanded of X / % change in price of Y

What does the cross elasticity of demand show?

• XED > 0 → Substitutes

• XED = 0 → Unrelated Products

• XED < 0 → Complements/derived/joint demand