Eco: Elasticity of DEMAND 2.5

What are the 3 types of elasticity:

1. price elasticity of demand (PED)

2. income elasticity of demand (YED)

3. price elasticity of supply (PES)

what is the formula for PED

% change in QD/ % change in P

define PED

The measure of responsiveness of consumers to a good due to change in price

how to calculate % change??

New -Old/Old *100

Inelastic demand

0<PED<1

Elastic demand

1<PED< infinity 

Price inelastic diagram

“More steep”

what is unit elastic demand???!

PED=1 when % change in QD is exactly = to % change in P  

What is Perfectly inelastic demand?

PED=0 when there is no change in QD to the price change

what is Perfectly elastic demand?

PED = infinity when even a slight increase will cause demand to fall to 0

Determinants of PED

• number & closeness of substitutes eg for inelastic- PETROL because no substitutes

• degree of necessity

• proportion of income spent on the good

• time

(SPLAT)

Total revenue: 

price * quantity traded

What decides TR?

PED ( how responsive are consumers to price change)

What happens to unity elastic demand in relation to TR

there is no change like it happens in inelastic

YED

% change