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LU 2: ELASTICITY (Income Elasticity of Demand (Normal goods, Positive…
LU 2: ELASTICITY
Income Elasticity of Demand
Normal goods
Positive relationship
Demand rises as price rises
Inferior goods
Inverse relationship
Demand falls as price rises
Determinants of Elasticity
Time period
Luxury or Necessity
Proportional of Income
Number of Substitutes
Addictive nature of good
Price Elasticity of Demand
Price Elasticity of demand = % :small_red_triangle: in quantity demand / % change :small_red_triangle: in price
If quantity demand change > :small_red_triangle: in price = Elastic demand
If quantity demand change < in :small_red_triangle: price = Inelastic demand
If quantity demand change equals to :small_red_triangle: in price = Unit Elasticity
Cross Price Elasticity of Demand
Relationship between changes in the price of one good and the demand for related goods
Substitutes :arrow_right: Positive relationship
Complements Negative :arrow_right: relationship
Price Elasticity of Demand
Measure of the responsiveness of quantity supplied to the change in prices.
If change in QS > :small_red_triangle: in Price = Elastic Supply
If change in Quantity Supply < :small_red_triangle: in Price = Inelastic Supply