2.5 Elasticities of Demand

• Price elasticity of demand


  A measure of the responsiveness of quantity demanded for a good or service
• PED = %∆Qd/%∆P
• If PED > 1 it is elastic
• Elastic demand


  • A flatter curve represents more elastic demand
• If PED < 1 it is inelastic
• Inelastic demand


  • A steep curve represents inelastic demand
• Substitutes


  • Number and closeness affect the sensitivity to price
• Proportion of Income


  • If a small proportion of income is spent on a good, a change in price will have a negligible impact on the quantity demanded
• Luxury or necessity


  • More necessary goods are more inelastic
• Addiction


  • Addicted people are willing to pay almost any price, making demand inelastic
• Time to make a decision

  • The longer the passage of time, the more elastic demand becomes
• Income elasticity of demand (YED)

  Measure of responsiveness of quantity demanded of a good or service to a change in income
• YED formula


  YED = %∆Qd/%∆Y
• Inferior Goods have YED<0
• YED = negative = inferior good
• YED = positive = normal good
• Necessity Goods


  Income inelastic, demand changes little as income rises or falls, YED < 1
• Luxury Goods


  Income elastic, demand changes significantly as income rises/falls, non-essential
• Income is more inelastic as it goes up
• As income increases more from 150k-200k, Maccas becomes an inferior good, and consumption decreases