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WHAT IS ELASTICITY?
The responsiveness of the quantity of an item purchased to changes in the item's
price…read more

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TYPES OF ELASTICITY
Price elasticity of demand (PeD)
Income elasticity of demand (YeD)
Cross price elasticity of demand (Xped)
Price elasticity of supply (PeS)…read more

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PRICE ELASTICITY OF DEMAND (PeD)
The responsiveness of demand to a change in the price level. The formula is
percentage change in quantity demanded divided by percentage change in price.
Equation: % change in quantity demanded OR % Qd
% change in price %P
If the result of the equation is:
<1 - inelastic
>1 - elastic…read more

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FACTORS THAT DETERMINE PeD
Availability of substitutes
When there are many available substitutes, price will be elastic
When there are few substitutes, price will be inelastic
Time
If the consumer needs the product immediately they may have to accept the increase in price so
demand is unresponsive
In the long term they may be able to switch to alternative suppliers
Luxury or a necessity good
Demand for luxury goods are likely to fall if the price rises
It is less likely for demand to fall for a necessity good if the price rises
Proportion of income
An increase in the price of very low priced goods that take up a small proportion of income would
be unlikely to fall
An increase in the price of an expensive item that would take up a larger proportion of disposable
income is likely to lead to a fall in demand…read more

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PeD AND THE INCIDENCE OF TAX
Incidence tax:
The proportion of a tax passed onto the consumer
If most tax is added to the consumer then the incidence of tax is said to be `high'
When demand is price inelastic then the incidence of tax tends to be high
The effect of taxes:
Firms will usually pass as much of the indirect tax onto consumers in the form of a price increases
(how much depends on PeD)
This could result in a fall in quantity sold due to a decrease in demand as a result of increased
prices
If the good is price elastic, the tax revenues are likely to fall because of the fall in demand
Employment in industries where price is elastic is likely to fall as a way of cutting costs
Effect of tax on equilibrium price and quantity of output…read more

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