Elasticity of Demand

Elasticity of Demand

Refers to the responsiveness of quantity demanded to a change in price or other factors.

Price Elasticity of Demand (PED)

The responsiveness of quantity demanded to a change in price, calculated as % change in quantity demanded / % change in price.

Perfectly Inelastic Demand

Occurs when PED = 0; change in price will have no effect on quantity demanded.

Perfectly Elastic Demand

Occurs when PED = infinity; even a small change in price leads to an infinite change in quantity demanded.

Inelastic Demand

Demand where PED < 1; less than proportionate response to price change.

Elastic Demand

Demand where PED > 1; more than proportionate response to price change.

Unit Elasticity

Occurs when PED = 1; proportionate response in quantity demanded to a price change.

Income Elasticity of Demand (YED)

Measures the responsiveness of quantity demanded to a change in income, calculated as % change in quantity demanded / % change in income.

Inferior Good

A good for which demand decreases as income increases, indicated by YED < 0.

Necessity Good

A good for which demand increases less than proportionately as income increases, indicated by 0 < YED < 1.

Luxury Good

A good for which demand increases more than proportionately as income increases, indicated by YED > 1.

Cross Elasticity of Demand (XED)

Measures the responsiveness of quantity demanded of Good A to a change in price of Good B, calculated as % change in quantity (A) / % change in price (B).

Complementary Goods

Goods for which an increase in the price of one leads to a decrease in quantity demanded of the other, indicated by a negative XED.

Substitute Goods

Goods for which an increase in the price of one leads to an increase in quantity demanded of the other, indicated by a positive XED.