3.2B-Price and Income Elasticity of Demand

What are elasticities?

•A measure of the strength of a relationship between two variables (independent and dependent)

•In a business marketing context, this applies demand (dependent), price (independent) and income (independent)

What is price elasticity of demand (PED)?

•A measure of the responsiveness/sensitivity of demand to a change in price

•The output will always be negative because price and demand have an inversely proportionate relationship

What is the formula for PED?

Percentage change in quantity demanded / percentage change in price

What is price inelastic demand?

•A PED where the percentage change in the price of a product will lead to a smaller percentage change in demand

•For example, if the PED of an output is -0.5, then when the price increases by 1%, quantity demanded of that output only decreases by 0.5%

•Furthermore, the application of the PED would be a net gain

How is price inelastic demand represented as a coefficient?

•The coefficient must be smaller than 1 (x<1)

•The closer the coefficient is to 0/smaller coefficient, the more price inelastic the output is to demand

How is price elastic demand represented as a coefficient?

•The coefficient must be larger than 1 (x>1)

•The further away the coefficient is to 1/larger coefficient, the more price elastic the output is to demand

What is income elasticity of demand (YED)?

•A measure of the responsiveness/sensitivity of demand to a change in income

What is the formula for YED?

Percentage change in quantity demanded / percentage change in income

What is price elastic demand?

•A PED where the percentage change in the price of a product will lead to a larger percentage change in demand

•For example, if the PED of an output is -2.5, then when the price increases by 1%, quantity demanded of that output decreases by 2.5%

•Furthermore, the application of the PED would be a net loss

What is income elastic demand?

A YED where the percentage change in the income of a consumer will lead to a larger percentage change in demand

What is income inelastic demand?

A YED where the percentage change in the income of a consumer will lead to a smaller percentage change in demand

What is a luxury good in terms of YED?

•The number must be larger than 1 (x>1)

•The further away the number is to 0/larger number, the more income elastic the luxury good is to demand

What is a normal good in terms of YED?

The number must be in between 0 and 1/larger than 0 but larger than 1(0<x<1)

What is an inferior good in terms of YED?

•The number must be smaller than 0(x<0)

•The further away the number is to 0/smaller number, the more income elastic the luxury good is to demand