Elasticities

Price elasticity of demand definition

measures the responsiveness of QD to a change in P

PED calculation

% change in QD / % change in P

price inelastic demand

PED = less than 1

responsiveness of qd is proportionally less than change in p

price elastic demand

PED = greater than 1

responsiveness of demand proportionally greater than change in price

unitary price elastic demand

PED = 1

responsiveness of demand proportionally equal to change in price

perfectly price elastic demand

PED = infinity

perfectly price inelastic demand

PED = 0

factors influencing PED

1. availability of substitutes
2. income
3. degree of necessity
4. time

price elastic demand curve is

not very steep

price inelastic demand curve is

very steep

what does the blue area represent?

area of revenue gained by raising price

what does the red area represent?

area of revenue lost by raising price

income elasticity of demand

measure of responsiveness of QD to a change in income

YED calculation

% change in QD / % change in Y

inferior good

good where demand falls when income increases (negative YED)

negative YED

inferior good

normal good

demand increases when income increases

positive YED

normal good

luxury goods

greater than 1

why does YED help supermarkets plan

if they know incomes will fall, can stock more inferior goods etc

cross price elasticity of demand

measure of the responsiveness of QD of one good or services to a change in the P of another good or service

XED calculation

% change in QD of (a) / % change in P of (b)

complementary goods

goods or services which consumers buy together, change in price of one good has an opposite effect on the demand to another good

substitute goods

goods or services which are alternatives for consumers, so a change in the P of gone good has a positive effect on the demand for another good

XED = -1

complements

XED = 1

substitutes

Price elasticity of supply

measure of the responsiveness of QS to a change in price

PES calculation

% change in QS / % change in P

factors affecting PES

1. spare production capacity
2. stocks of finished products
3. ease and cost of factor substitution
4. time period and product speed

inelastic supply

PES

elastic supply

PES >1

increase in P leads to a greater % change in supply

inelastic supply curve

steep