Booklet 3 - elasticity of supply and demand

• Price elasticity of demand


  How responsive demand is to a change in price
• Price inelasticity of supply


  The responsiveness of supply to changes in price levels
• Income elasticity of demand (YED)

  Responsiveness of demand to changes in income
• Cross price elasticity of demand (XED)

  Responsiveness to which a change in price of one good effects the demand for another good
• Elastic


  Responsive to changes in demand or price
• Inelastic


  When average incomes rises the demand for these items decrease
• Substitute good


  Goods which can be used as an alternative for other goods
• Complementary goods


  Goods that are consumed together
• PED= %change in quantity demanded / %change in price
• Demand is price elastic if the PED > 1
• Demand is price inelastic if the PED < 1
• Factors that effect PED of a product :

  1. availability of substitutes
  2. proportion of income spent on good
  3. luxury or necessity item
  4. type of market
  5. time
• Normal goods


  Goods and services which see an increase in demand when incomes rise. (+ YED)
• Inferior goods


  Demand falls when incomes rise ( -YED)
• YED= %change in QD/ %change in income
• XED= %change in QD of good A / %change in the price of good B
• Factors effecting PES:

  1. the length of production supply
  2. Availability of spare capacity
  3. availability of stocks or stockpiling
  4. ease of switching
  5. no of firms in market
  6. time
• PES= %Q supplied / %change in price
• When PES<1 its unresponsive to a change in price
• Cross elasticity of demand (XED) is the responsiveness of demand for one product to a change in the price of another product.