Elasticity

Every time Chris say “Elasticity” your answer should be “Responsiveness”

The definition you read in your book says that elasticity is the extent to which buyers and sellers respond to a change in market conditions.

When the price is elastic, the percent change in the demand is sensitive to a change in price, when this allows to that the consumers choose a alternative(substitute) product.

Inelasticity:

The price is inelastic when the percentage change in the quantity demanded is insensitive to a change in price.

Example: Oil

The formulas:

• Price elasticity of demand(PED) is the responsiveness of the demand to a change in the price of the product.

%change quantity demanded / %change in price

• If PED = 0 then demand is perfectly inelastic.

• If PED is between 0 and 1, then demand is inelastic.

• If PED = 1, then demand is unit elastic

• If PED > 1, then demand is elastic

• Price elasticity of supply(PES) is the responsiveness of the quantity supplied to change in the price of the product:

%change quantity supplied / %change in price

• When PES is > 1, then supply is price elastic

• When -1 PES is <1,>

• When PES = 0, supply is perfectly inelastic

• When PES = infinity, supply is perfectly elastic following a change in demand

• Cross elasticity of demand(XED) is the responsiveness of demand for one product in relation to change in the price of another product:

%change in quantity demanded of a product A / %change in price of a product B

• When XED is >0, gives substitutes goods

• When XED is <0,>

• Income elasticity of demand(YED) is the responsiveness of demand to change in income:

%change in quantity demanded / %change in income

• Normal goods: >0, positive

• Inferior good: <0,>

Sources:

• OCR Economics AS

• http://www.tutor2u.net/economics/revision-notes/index.html