Elasticities

Elasticities

Elasticities shows how much the demand changes when the
factors affecting it change (such as price, income, etc.). It
measures how sensitive the demand is to these factors.

• Price elasticity of demand (PED)
• Income elasticity of demand (IED)
• Cross elasticity of demand (CED)
• Price elasticity of supply (PES)

Price Elasticity of Demand
Price elasticity of demand (PED) – measures the change in the
demand with unit change in the price of the product.

PED=%age change in the demand of good X / %age change in the price of good X

	Elasticity	Note
PED<1	inelastic	usually the essentials
PED=1	unitary elastic	unit price unit demand
PED>1	elastic	luxeries

Income Elasticity of demand
Income elasticity of demand (IED) – measures the change in the
demand with unit change in the income.

IED=%age change in the demand of good X / %age change in the income

	NOTE	TYPE OF GOOD
IED<0	fall in demand increase in income	Inferior good
IED>0	rise in demand increase in income	Normal good

Cross Elasticity of Demand
Cross elasticity of demand (CED) – measures the change in the
demand of one product with unit change in the price of other
product.

CED=%age change in the demand of good X / %age change in the price of good X

	NOTE
CED<0	Complementary goods
CED=0	Unrelated goods
CED>0	Substitutes

Price Elasticity of Supply (PES)
Price Elasticity of Supply – Measures the change in the supply with
unit change in the price of the product.

PES=%age change in supply / %age change in price

	NOTE
PES<1	Thre supply is inelastic
PES>1	The supply is elastic