4.1.3.2 Elasticity

• PED = % change in Qdx / % change in Px
• PED will always be negative, unless the good is perfectly inelastic
• If PED = 0, then a good is perfectly inelastic
• Example of a perfectly inelastic good are hard drug, which someone is addicted to.
• A perfectly inelastic good, when PED = 0, has a vertical gradient
• A relatively inelastic good has a steep gradient
• A good is relatively inelastic when PED is greater then 0, nut less then 1
• A good is relatively elastic, when PED if greater then 1 but, less then infinity
• A relatively elastic good has a lot of subsitutes
• A good is unitarily elastic if PED = 1
• A perfectly elastic good, has a PED of infinity
• Factors that affect price Elasticity of Demand:

  • Availability of substitutes
  • Cost of switching
  • Degree of necessity
  • Time frame
  • Brand loyalty
  • habit forming products
• The more subsitutes available, the more elastic a good is
• The higher the cost of switching, the more inelastic a good is
• The more general a product is, the more elastic it is
• The greater the degree of necessity, the more inelastic a good is
• The smaller the time frame is, the more inelastic the good is
• The more brand loyalty a good has, the more inelastic a good is
• If a good is relatively inelastic, and the price is raised, then profit will increase
• If a good is relatively inelastic and the price is lowered, then profit will fall
• If a good is relatively elastic and the price is raised, then profit will fall
• If a good is relatively elastic and the price is lowered, then profit will increase#
• YED = % change in Qdx / % change in Y
• If YED is negative, then the good is an inferior good
• If YED is positive, then it is a normal good
• Inferior Good: less is bought of it if income rises
• Normal Good: more of it is bought as income rises
• If YED = 0, then the good is neutral
• Neutral good: no more or less of the good is bought, if income rises, eg. salt
• If YED > + 1, the good is a luxury good
• If 0 < YED < + 1 , then the good is a necessity
• XED = % change in Qdx / % change in Pz
• If XED is negative, the goods are complements. Eg. If the price of a PS5 decreases, the demand for PS5 games will increase
• If XED is positive, then the goods are susitutes. Eg. if the price of Aldi increases, the quantity demand in Lidl will increase.
• If XED = 0, then the goods are independent, a change in price in one good, has not effect on the quantity demand of another
• PES = % change in Qsx / % change in Px
• Apart from perfectly inelastic goods PES is always positive
• The greater the value Of PES, the more elastic / responsive the good is to a change in price
• PED = Price Elasticity of Demand - The responsiveness of demand to a change in price of the good.
• YED = Income Elasticity of Demand - the responsiveness of demand to a change in the income of the consumer