Price Elasticity of demand, Income Elasticity of demand, Cross Elasticity of demand, Price Elasticity of supply, Elastic, Inelastic

Whenever a change in one variable causes and change to occur in a second variable

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Price Elasticity of demand

  • Measures consumers responsiveness to a change in a good's own price
  • Sustainability is the most important determinant of price elasticity of demand
  • When a substitute exists for a product, consumers can repsond to a price rise by switching expenditure to a lower priced good - demand is elastic
  • Demand for necessities tends to be inelastic as they have few substitutes
  • Other determinants of this are:
    - Percentage of income - Households that spend a large amount of their income tend to be in more elastic demand 
    - The 'width' of the market definition - the demand of shell petrol is more price elastic than the petrol produced by all the oil companies - Time - demand is more elastic in the long run - takes time to respind to price change
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Income Elasticity of demand

  • Measures how demand responds to a change in income
  • Negative - inferior goods - QD falls as income rises
  • Posititive - normal goods - QD rises with income
  • Normal goods are sometimes further subdivided into superior or luxury goods - the income elasticity of demand is greater than unity
  • Basic goods - income elasticity of <1
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Cross elasticity of demand

  • Measures the responsiveness of the demand for one good to changes in price for another good
  • Joint demand - negative cross elasticity
  • Competiting demand or substitutes - positive cross elasticity
  • Absense of any disernable relationship with demand - zero cross elasticity
  • Substitutes - positive
  • Compliments - negative
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Price elasticity of supply

  • Measures the extent to which firms are prepared to increase output in response to a change in price


  • Length of production period - short period, supply more elastic
  • Existence of spare capacity - when firm possesses spare capacity and has labour and raw materials availiable - possible to increase production quicker in the short run
  • Ease of accumulating stocks - unsold stock can be stored at low costs - supply can meet demand when it rises- makes firm more supply elastic
  • Ease of factor substitution - Supply tends to be relatively elastic if firms can use different combinations of labour and capital to produce a particular level of output
  • Number of firms in the market - Greater number of firms - more elastic the market is
  • Time- supply is completely inelastic  in the market period, often relatively inelastic in the short run. More elastic in long run - when firm can change scale of all its inputs or factors of production in response to change in demand
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