Elasticities of Demand

• Elasticity


  The responsiveness of one variable to a change in another
• Elasticity of Demand


  The responsiveness of demand to a change in a factor which affects demand
• Price elasticity of demand (PED)


  The % change in quantity demanded divided by the % change in price
• Income elasticity of demand (YED)


  The % change in quantity demanded divided by the % change in income
• Cross elasticity of demand (XED)


  The % change in quantity demanded of Good A divided by the % change in the price of Good B
• Perfectly inelastic demand


  The result of the calculation is zero.

  The demand curve is a vertical line meaning that demand will not change even if there is an increase in another variable.

  This is because the good is a necessity good with absolutely no substitute or no reasonable substitute.
• Inelastic demand


  The result of the calculation is less than 1

  The curve is going to be downward sloping with a steep slope

  The good may be a necessity good which has a few reasonable substitutes. Hence demand may change but not by much
• Unitary Elastic Demand


  The result of the calculation is 1 or -1.

  %change in demand = %change in the other variable.

  The curve has a gradient of 40 degrees
• Elastic demand


  The result of calculation is greater than one

  That indicates that the %change in demand is greater than the % change in another variable.

  It is downward sloping with a gentle slope.

  Goods with Elastic demand are goods with many readily available substitutes.
• Perfectly elastic demand


  The result of the calculation is infinity or -infinity

  Demand will change without another change in another variable.

  The curve is a horizontal line.
• PED(Price Elasticity of Demand)


  += Giffen(hype)

  -= Normal good
• YED(Income Elasticity of Demand)

  +=Normal Good

  -=Inferior Good
• XED(Cross Elasticity of Demand)

  +=Substitute Good

  -=Complimentary Good
• Steps to Calculating Elasticity of Demand

  Step1-Calculate(new-old)

  Step2-Calculate(change/old)*100

  Step3-Aplly the formula e.g %Change of Qd/%change of price
• PED = Positive the good is a ....

  and if it is negative, it is a

  Giffen for positive and Normal for negative
• YED if positive it is a

  if negative it is a


  Positive is noramal

  Negative is inferior
• XED if result is positive it is a and if it is negative it is a 


  Positive for substitute and Negative for complimentary