2.5 Elasticity of demand

• Elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to changes in one of the factors that determine it.
• Price elasticity of demand (PED) is a measure of how much the quantity demanded of a good changes when there is a change in its own price.
• PED = % change in quantity demanded / % change in price
• Price elastic demand:

  PED > 1
• Price inelastic demand:

  0 < PED > 1
• Unitary elastic demand:

  PED = 1
• Perfectly inelastic demand:

  PED = 0
• Perfectly inelastic demand:

  PED = ∞
• Determinants of PED:

  • number and closeness of substitutes
  • degree of necessity
  • proportion of income spent on the good
  • time
• When the price of a product increases. the quantity demanded will fall, and therefore the quantity sold by firms will fall as well.
• Relatively inelastic PED.

  
• Relatively elastic PED

  
• Income elasticity of demand (YED) is a measure of how much the quantity demanded of a good will change in response to a change in consumers' incomes.
• YED = % change in quantity deamnded / % change in income
• Income elastic demand applies to services and luxury goods.
• Income inelastic demand applies to necessities.
• A positive YED applies to normal goods.
• A negative YED applies to inferior goods.