Summary Elasticity

Elasticity

LO: Calculate price, income and cross elasticities of demand

• Elasticity – a measure of how much the quantity demanded of a product or
service will be affected by a change in price, income or price of another product
• Price elasticity of demand (PED) measures the proportionate responsiveness of
quantity demanded to a change in price
• PED = % change in quantity demanded / % change in price
• If PED > 1: Elastic – demand is responsive to change in price
• If PED < 1: Inelastic – demand is unresponsive to change in price
• Inelastic demand curves:




• Perfectly inelastic demand curve




• Price inelastic product examples
o Oil
o Insulin
o Cigarettes
o Transport
o Water

, • Elastic demand curve




• Perfectly elastic demand curve




• Price elastic product examples
o Apples
o Chocolate
o Coffee
o Juice



• Determinants of price elasticity of demand
o Addiction
o Health
o Necessities or luxury items
o Seasonal factors
o Monopolies
o Availability of substitutes
▪ More substitutes – elastic
▪ Less substitutes – inelastic