Elasticity

Price Elasticity of Demand (PED)

Definition:
Price elasticity of demand measures how much the quantity demanded of a good changes in response to a change in its price. It is calculated as:

Price Elasticity of Demand (PED)=(% Change in Quantity Demanded) / (% Change in Price)

• Elastic Demand (PED > 1): Quantity demanded changes more than the price change. Example: luxury goods, non-essentials.

• Inelastic Demand (PED < 1): Quantity demanded changes less than the price change. Example: necessities like petrol or salt.

• Unitary Elasticity (PED = 1): Percentage change in quantity demanded equals the percentage change in price.

• Perfectly Elastic (PED = ∞): Any price increase drops demand to zero.

• Perfectly Inelastic (PED = 0): Demand does not change with price.

Example:
If the price of apples falls by 6% and purchases increase by 20%, PED = 20% / 6% = 3.33 (elastic).

Factors Affecting PED:

• Availability of substitutes

• Necessity vs. luxury

• Proportion of income spent

• Time period considered

Income Elasticity of Demand (YED)

Definition:
Income elasticity of demand measures how much the quantity demanded changes as consumer income changes.

Income Elasticity of Demand (YED)=(% Change in Quantity Demanded) / (% Change in Income)

• Normal Goods (YED > 0): Demand increases as income rises.

• Inferior Goods (YED < 0): Demand decreases as income rises.

• Luxury Goods (YED > 1): Demand increases more than proportionally as income rises.

Cross Elasticity of Demand (XED)

Definition:
Cross elasticity of demand measures how much the quantity demanded of one good changes in response to a price change of another good.

Cross Elasticity of Demand (XED)=(% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)

• Substitutes (XED > 0): Demand for Good A rises if the price of Good B rises (e.g., tea and coffee).

• Complements (XED < 0): Demand for Good A falls if the price of Good B rises (e.g., printers and ink).

Price Elasticity of Supply (PES)

Definition:
Price elasticity of supply measures how much the quantity supplied of a good changes in response to a change in its price.

Price Elasticity of Supply (PES)= (% Change in Quantity Supplied) / (% Change in Price)

• Elastic Supply (PES > 1): Quantity supplied responds strongly to price changes.

• Inelastic Supply (PES < 1): Quantity supplied responds weakly to price changes.

• Unitary Elasticity (PES = 1): Proportional response.

Factors Affecting PES:

• Production flexibility

• Time period

• Availability of inputs