Transcript Elasticity

Elasticity
Price elasticity of demand
 Measures the responsiveness to a change in price;
that is, will the quantity demanded change if the
price of the product is changed?
 Formula:
Percentage change in quantity demanded
Percentage change in price
Elastic or inelastic?
 When you do your calculations, if your answer is:
 Between 0 and 1, your product is price inelastic:
unresponsive to price change
 Equal to 1, your product is unit price elastic: a
change in price results in a proportional change in
demand
 Greater than 1, your product is price elastic:
responsive to price change
Income elasticity of demand
 Measures the change in demand for a product if
there is a change in consumers' income.
 Formula:
Percentage change in quantity demanded
Percentage change in income
Elastic or inelastic?
 Less than 0, inferior goods (demand falls as
incomes rise)
 Between 0 and 1, normal goods: necessities
 Greater than 1, normal goods: luxury/superior
goods (income elastic, very responsive to changes
in income – demand rises as incomes rise)
Cross-elasticity of demand
 Measures the change in demand for one product
if there is a change in the price of another
product.
 Formula:
Percentage change in quantity demanded for product A
Percentage change in price of product B
Elastic or inelastic?
 Products that can replace each other (substitutes)
will have a positive XED (demand for tea will increase
if price of coffee goes up)
 Products that are linked (complements) have a
negative XED (demand for DVDs will fall if DVD
player price goes up)
 Goods with no relationship will have an ED of zero
(price of jeans does not affect price of chocolate)
Advertising elasticity of demand
 Measures the change in demand in response to a
change in advertising expenditure
 Formula:
Percentage change in quantity demanded
Percentage change in advertising expenditure
Elastic or inelastic?
 Less than 1, advertising inelastic (change in
demand is less than the change in expenditure)
 Greater than 1, advertising elastic: (change in
demand is more than the change in expenditure)