2. Elasticity of Demand and Supply

What is Price Elasticity of Demand

PED measures the responsiveness of quantity demanded given a change in price

Determinants of Price Elasticity of Demand

Substitutes (Number of)

Percentage of Income

Luxury/Necessity

Addictive Goods

Time Period

PED Numerical Values Meaning?

>1 = Demand is price elastic
<1 = Demand is price inelastic
0 = Demand is perfectly price inelastic
Infinity = Demand is perfectly price elastic
1 = Demand is unit price elastic

What is Price Elasticity of Supply

PES measures the responsiveness of quantity supplied given a change in price

Determinants of Price Elasticity of Supply

Production Lag

Stocks

Spare Capacity

Substitutability of Factors of Production

Time Period

PES Numerical Values Meaning?

>1 = Supply is price elastic
<1 = Supply is price inelastic
0 = Supply is perfectly price inelastic
Infinity = Supply is perfectly price elastic
1 = Supply is unit price elastic

What is Income Elasticity of Demand

YED measures the responsiveness in quantity demanded given a change in price

YED Numerical Values Meaning?

(+)>1 = Income Elastic: Income increases, normal good demand increases proportionately more (referred to as normal luxury)
(+)<1 = Income Inelastic: Income goes up, normal good demand increases proportionately less (referred to as normal neccesity)

(-)>1 = Income elastic: Income increases, inferior good demand decreases proportioantely more
(-)<1 = Income inelastic: Income increases, inferior good demand decreases proportionately less

What is Cross Elasticity of Demand

XED measures the responsiveness of quantity demand of a good/service given a change in price of another

XED Numerical Values Meaning?

>1 = Demand between the goods are price elastic (strongly related)
<1 = Demand between the goods are price inelastic (weakly related)
0 = Demand between the goods are perfectly price inelastic (no relationship)

Positive: Substitutes

Negative: Complements