Notesale: Turn your study into money

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Price and income elasticity
Elasticity is a measure of how sensitive the mand for a good or service is to a
change in its price
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Demand for some goods and services changes a lot
when the price moves up or down, whilst others change very little
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In near perfectly
competitive markets, there are lots of competitors selling goods that
are very similar to one another
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Even a small increase in price will result in a
dramatic decrease in the quantity demanded for
the good in a near perfectly competitive market

Inelastic demand:
If the demand for a good or service changes by a smaller
percentage than the percentage then uin its price, it is inelastic
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The producer has greater power over
prices in the market,
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Even a significant increase in price will result in a very
small decrease in the quantity demanded for the good

How to calculate price elasticity of demand:

Elasticity and markets:
Most firms don't face extremes of a nearly perfectly elastic or inelastic demand good
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This gives firms greater levels of control over their prices
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g
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-For businesses with price elastic goods, any rise in price will create larger falls in
demand and this will mean lower levels of revenue
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Income elasticity of demand (YED):
This is a measure of how responsive demand for a good service is to a change in the
income levels of consumers
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This means that the demand for many types of goods will increase (normal and
luxury goods)
Normal goods:
As consumer incomes rise they buy more of this type of good
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Most items are
under this category
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Consumers buy
disproportionately more of these items when incomes rise buy these are
the first things to be cut when incomes fall
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An example of this would be Tesco value baked
beans as if incomes rose consumers would spend money on a higher quality
substitute such as Heinz
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4) What is the definition of the term elasticity?
A measure of how sensitive demand is to a change in the price of a good or service

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