Measure of showing the relationship between price and quantity demanded
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Formula for PED
% change in quantity demanded / % change in price
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When PED = 0
Perfectly inelastic: demand doesn't change when price does
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When PED > 1
Elastic: greater the value of the co-efficient the more elastic
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When PED < 1
Inelastic: great change in price does not affect demand as much
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Factors Influencing PED
Amount of substitutes, Price related to income, Brand Loyalty/ Habitual consumption, degree of necessity/luxury
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When Inelastic
Total revenue falls and demand curve is steeper
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When elastic
Total revenue rises demand curve is shallower
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Unitary Elastic
change in price is proportional to change in demand, curved demand curve
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What happens to elasticity as you move down the demand curve
Varies
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Why is PED useful for producers
shows affect of a change in price on total revenue, shows price volatility(important for commodity producers), shows effect of indirect tax on price and quantity demanded
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What is price discrimination
when a producer charges different prices for the same product to different parts of the market, businesses will charge higher to consumers that are demand inelastic
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Problems with PED
Inaccurate or incomplete data, PED varies across regions, varies between product ranges e.g. economy and premium products
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What is YED
measure of how responsive demand is when a persons real income changes
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Formula for YED
%change in quantity demanded/ % change in real income
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when YED > 1
Income elastic: large change in income results in greater change in demand
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When YED < 1
Income Inelastic change in income doesn't affect change in demand as much
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Normal necessities
YED positive greater than 0, are income inelastic
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Normal luxuries
YED positive greater than 0, income elastic
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Inferior goods
Increase in income means demand decreases YED negative <0, causes inward shift of demand curve when in periods of economic growth, in period of recessions demand increases
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What is PES
measure of the relationship between change in quantity supplied and a change in the good's own price
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When PES>1
price elastic
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When PES<1
price inelastic
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PES = 0
perfectly inelastic
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When PES = infinity
perfectly elastic following a change in demand
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Factors affecting PES
Spare production capacity, stocks of finished products and components, ease and cost of factor substitution, time period and production speed
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When PES is elastic the supply curve looks
shallow
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When PES is inelastic the supply curve looks
steep
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What is XED
Measure of the responsiveness of demand for good X following a change in price of related good Y
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Substitutes
competitive demand, increase in price of one good leads to an increase in demand for rival prosecute, XED for two substitutes is always positive
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Complements
joint demand, fall in price of one leads to increase in demand for other, XED always negative
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Formula for XED
%change in demand for goodX/ % change in price for goodY
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