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Elasticity
Price elasticity of demand (PED) –
The responsiveness of quantity demanded over
a change in price
...
  Price inelastic demand (0 < PED < 1) –
This means that the %ΔQd is smaller than
the %ΔP, or that a small change in price
leads to a proportionally smaller change in
quantity demanded
...
  Perfectly price inelastic demand
(PED = 0) – This means that a change in
price will not lead to a change in Qd
...
This means that the mathematical
value of PED would also usually be negative
...

Ranges of PED
1
...


0

Q

5
...


P

2
...


Unitary price elastic,
PED = 1
P1

P
Perfectly elastic, PED=∞
D

0

Q

0

Q1

Q

Determinants of PED –
1
...
The
more and/or closer the substitutes there are
for a good, the more easily people will
switch to these alternatives when the price
of the good rises, thus the greater the PED
...
  Habit (necessity or addiction) – If the
good/service is considered to be a
necessity/addictive, then the more price
inelastic the demand will be
...
g
...

3
...

4
...
The longer the time period after a
price change, the more price elastic the
demand is likely to be
...

Þ   Responsiveness to a price change (i
...

PED) will be higher, the higher the initial
price of the good, so the more expensive it
is
...
The higher price will be
charged with the relatively inelastic
demand
...

•   PED helps a government predict the effect
of currency devaluation on the trade
balance of the country
...
Consider the following
cases:

PED = 1

PED < 1
D
0

Quantity

Þ   At the midpoint M of a demand curve,
price elasticity is equal to 1
...
A change in price when PED > 1
When demand is price elastic, a change in
price leads to a proportionally bigger change
in quantity demanded, so that:
Þ   If P rises, Qd falls proportionally more
and so TR will fall
...


Case 2
...

Þ   If P falls, then Qd increases proportionally
less, so TR will fall
...
A change in price when PED = 1
When demand is unit price elastic, price and
quantity will change in exactly the same
proportion
...

Cross elasticity of demand (XED) –
The responsiveness of quantity demanded of
good A over a change in price in another good
B
...
g
...

If XED < 0, then the two gods are
complements, meaning that they are jointly
demanded: if one becomes more expensive
and less people buy good A, less people will
buy good B (e
...
sushi and wasabi)
...


The further away from 0 XED is, the
stronger the relationship between the
goods
...

Applications of XED –
Firms can use XED to guide their pricing
policy changes
...

Income elasticity of demand (YED) –
The responsiveness of the quantity demanded
of a good to a change in consumer income
Formula
Measured by the percentage change in
quantity demanded over the percentage change
in income:
𝒀𝑬𝑫 =  

𝑷 𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆   𝒄 𝒉𝒂𝒏𝒈𝒆 =  

%∆𝑸𝒅
%∆𝒀
𝒏𝒆𝒘   𝒗 𝒂𝒍𝒖𝒆 − 𝒐𝒍𝒅   𝒗 𝒂𝒍𝒖𝒆
𝒐𝒍𝒅   𝒗 𝒂𝒍𝒖𝒆

YED values
If YED > 0, then the good is a normal good,
since demand increases as consumer income
increases: both income and demand change in
the same direction
...
Luxury
goods are considered income elastic
...
  If PES > 1, then a %ΔP will lead to a
proportionally larger %ΔQs
...

P

S

If 0 < YED < 1, then the %ΔQd is smaller
than the %ΔY, thus demand is income
inelastic, as a rise in income leads to a
proportionally smaller rise in Qd
...

If YED = 0, then Qd is not affected by a
change in income
...


0

Q

2
...


Applications of YED
P

Þ   Firms would like to know whether the
demand for their good is highly income
elastic or moderately income inelastic to
help plan future investments
...

Price elasticity of supply (PES) –
The responsiveness of quantity supplied over a
change in price
...
  If 0 < PES < 1, then supply is price
inelastic
...

P

S

%∆𝑸𝒔
%∆𝑷

𝒏𝒆𝒘   𝒗 𝒂𝒍𝒖𝒆−𝒐𝒍𝒅   𝒗 𝒂𝒍𝒖𝒆
𝒐𝒍𝒅   𝒗 𝒂𝒍𝒖𝒆

0

Q

4
...
It means that a change in price
will not change Qs
...

Short-run supply refers to the response of
the Qs to a price change after some of the
technologically feasible adjustments in
production have been made
...

Determinants of PES

0

Q

5
...

P

2
...

3
...


S

0

1
...


Q

4
...

Applications of PES

Supply decisions have three time frames
Momentary supply refers to the response
of the Qs to a price change at the instant
that the price changes
...

Momentary supply is perfectly inelastic
because on a given day, no matter the

Commodities are raw materials in the primary
sector (e
...
cotton & coffee)
...

Conversely, manufactured goods/services
are characterised by higher PES (price
elastic) because given a production plant, the
extra costs of producing additional units are
typically low

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