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Price Elasticity of Demand (P.e.d)

Price elasticity of demand is the responsiveness of demand of a good or service to a change in price

P.e.d = a change in quantity demanded / percentage change in price

Elastic Demand: is responsive to changes in price

Inelastic Demand: is unresponsive to changes in price

Factors that influence the P.e.d of a good/service:

  • Necessities (inelastic)
  • Luxuries (elastic)
  • Number of Substitutes
  • Percentage of income spent on a good/service
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Income Elasticity of Demand (Y.e.d)

Income elasticity of demand shows how responsive the demand for a product is to a change in real income

Y.e.d = peace fave chance in quantity demanded / percentage change in real income

Normal good: positive income elasticity
Luxury good: positive income elasticity above 1
Necessity: positive income elasticity between 0 and 1
Inferior: negative income elasticity (inverse relationship)

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Price Elasticity of Supply (P.e.s)

Price elasticity of supply measures the relationship between change in quantity supplied and a change in price

P.e.s = percentage change in quantity supplied / percentage change in price

Answer is always positive

If supply is elastic, producers can increase their output without a rise in cost or a time delay

If supply is inelastic, producers find it hard to change their production in a given time

Factors effecting Price Elasticity of Supply:

  • Spare production capacity
  • Stocks of finished products and components
  • Time period and production speed
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Cross Elasticity of Demand (X.e.d)

Cross elasticity of demand is the responsiveness of demand for one good in relation to a change in price of another

X.e.d = percentage change in quantity demanded of good X / percentage change in price of good Y

Positive outcome: product is a substitute good
Negative outcome: product is a complementary good

The higher the number the stronger the relationship between the two goods

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