Elasticity

PED, PES, XED, YED.

PED

Responsiveness of Qd given a change in price.

PED Formula

%∆Qd / %∆P

How to calculate % change

Difference / Original

PED > 1

Price Elastic of Demand

PED < 1

Price Inelastic of demand

PED = 1

Unit price elastic

Determinants of PED (SPLAT)

• Substitutes (less, PED < 1) - No alternatives

• Percentage of income (less, PED > 1)

• Luxury/Necessity (Necessity, PED < 1)

• Addictive (Yes, PED <1)

• Time Period (Long Run, PED > 1)

PES

Responsiveness of quantity supplied given a change in price.

PES Formula

%∆Qs / %∆P

PES > 1

Price Elastic of supply

PES < 1

Price Inelastic of supply

Determinants of PES (PSSST)

• Productivity Lag (longer, PES < 1)

• Stock (larger, PES >1)

• Spare capacity (more, PES > 1)

• Substitutability of FoP (more, PES > 1)

• Time (short run, PES < 1)

Cross Elasticity of Demand (XED)

Measures the responsiveness of quantity demanded of a good/service given a change in price of another.

Formula for XED

%∆Qd_a / %∆P_b

Substitute goods in XED

Positive (if price of a good goes up, the quantoty demanded will fall, increasing the demand for its substitute good).

Complement goods in XED

Negative. If price of a good goes up, the demand for its complement will fall, making the value negative.

XED > 1

Elastic (strongly related) - when price of one good changes, the quantity for the other will change proportionally more,

XED < 1

Inelastic (weakly related)

XED = 0

Perfectly inelastic (no relationship)

Income Elasticity of Demand (YED)

Measures responsiveness of quantity demanded given a change in income.

Formula for YED

%∆Qd / %∆Y

Normal Goods on YED

Positive. Consumption increases when income increases.

Inferior goods on YED

Negative. Consumption increases when income decreases.

YED > 1

Elastic (normal luxury)

YED < 1

Inelastic (normal necessity)