2.2

• Elasticity is the responsiveness of one variable due to a change in another
• Types of elasticity:

  PED - price elasticity of demand

  YED - income elasticity of demand

  XED - cross elasticity of demand

  PES - price elasticity of supply
• PED measures the responsiveness of demand to a change in price
• PED is always a negative number because of the inverse relationship between price and quantity
• Price elastic demand is when a small change in price causes a bigger change in quantity demanded. Percentage change Quantity demanded is always bigger than percentage change in price causing PED > 1
• Perfectly elastic demand is when the number gets more elastic until it becomes a horizonal line

  Demand changes infinitely to a small change change in price
• Price inelastic demand is when a big change in price causes a small change in quantity demanded causing the line to be steep.

  PED <1
• Perfectly inelastic demand as the number gets closer to zero it becomes more inelastic till it becomes a vertical line. A big change in price causes no change in demand.

  PED = 0
• Income elasticity of demand measures the responsiveness of quantity demanded to a change in income
• Positive income elasticity is when an increase in income results in an increase in quantity demanded. Happens to normal goods
• Normal goods are are basic and superior goods.For example TV
• Inferior goods are necessity goods.For example bread
• Luxury goods are goods that are expensive.For example sports cars
• Income elastic demand is when a small rise in income causes a big ​increase in quantity demanded.Consumers are very responsive.

  YED is greater than 1
• Negative income elasticity is when an increase in income results in a decrease in quantity demanded. Happens to inferior goods
• Income inelastic demand is when a big change in income leads to a small change quantity demanded.Consumers are unresponsive.

  YED Is less than 1
• Cross elasticity of demand measures how the demand for one good is affected by the price of another.

  • Substitute goods
  • Complements goods
• Substitute goods are goods that are seen as alternatives. e.g coke and Pepsi
• Positive cross elasticity of demand

  • When the increase in price for product A leads to an increase of quantity demanded for product B.
  • For substitute goods
• Complement goods are two goods that are used together.For example printer and printer ink
• Negative cross elasticity of demand

  • When a rise in the price of product A causes a decrease in quantity demanded for product B.
  • For complement goods
• Acronym for Cross elasticity of demand

  Party - positive

  Season - Substitute

  Near - Negative

  Christmas - Complement
• Unrelated goods are goods that have zero relation between each other. e.g Car and cupcake
• Unitary demand is when PED is exactly at 1.The percentage change in price is equal to a percentage change in quantity