Price, Income, and Demand Elasticities : Economics

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5 Terms

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own-price elasticity of demand (PED)

Measures the sensitivity or responsiveness of the quantity demanded of a good to a change in its own price. A a unit-free measure of the responsiveness of demand

<p>Measures the sensitivity or responsiveness of the quantity demanded of a good to a change in its own price. A a unit-free measure of the responsiveness of demand</p>
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Elasticity

  • Definition: Measures the responsiveness of one economic variable to a change in another.

  • Elastic demand: Quantity demanded changes by a greater percentage than price (PED greater than 1 in absolute value).

  • Inelastic demand: Quantity demanded changes by a smaller percentage than price (PED less than 1 in absolute value).

  • Unitary elasticity: Quantity demanded changes by the same percentage as price (PED equals 1 in absolute value).


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Income elasticity of demand (IED)

Measures the sensitivity or responsiveness of the quantity demanded of a good to a change in income

<p>Measures the sensitivity or responsiveness of the quantity demanded of a good to a change in income</p>
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Normal and inferior goods

Normal goods have a positive income elasticity of demand

  • An increase in income leads to an increase in the quantity demanded

  • Dairy or vegetables

Inferior goods have a negative income elasticity of demand

  • An increase in income leads to a fall in quantity demanded

  • Bikes


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Price elasticity of supply (PES)

The responsiveness of quantity supplied to a change in price.