Economics A-level Edexcel B

2.2 Elasticities

Price Elasticity of Demand

Measures the responsiveness of demand to a change in price

Price Elasticity of Demand formula

Ped = % Change in Quantity Demanded / % Change in Price

If PED is between 0 and -1…

the demand is inelastic, so consumers are less responsive to price changes.

If PED is between -1 and -∞…

the demand is elastic, meaning consumers are highly responsive to price changes.

PED is always -ve so has a - sign in front of it

This is because there is an inverse relationship between price and demand.

total revenue formula

TR = price x quantity sold

If demand is price elastic…

• increasing price would reduce total revenue

• Reducing price would increase total revenue

If demand is price inelastic…

• increasing price would increase total revenue

• reducing price would reduce total revenue

Income Elasticity of Demand (YED)

Measures the responsiveness of demand to a change in income

Normal Good (in terms of YED)

Demand rises as income rises and vice versa

Has a positive sign

Inferior Good (in terms of YED)

Demand falls as income rises and vice versa

Has a negative sign

Income Elasticity of Demand formula

YED = % Change in Quantity Demanded / % Change in income

Cross Elasticity

The responsiveness of demand of one good to changes in the price of another good - either a substitute or a complement

Cross Elasticity formula

Ced = % Change in Quantity Demanded of good A / % Change in Quantity Demanded of good B

Cross elasticity in Complements

Ced will have a negative sign

(inverse relationship between the two)

Cross elasticity in Substitutes

Ced will have a positive sign

(positive relationship between the two)