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Price Elasticity of Demand (PED) Income Elasticity of Demand (YED) -…
Price Elasticity of Demand (PED)
Income Elasticity of Demand (YED)
Formulas
% change in quantity demanded / % change in price (PED)
%change in quantity demanded / % change in income (YED)
Key Values of PED
Unitary Elastic
PED= 1
Change in quantity demanded is the same as the change in price
Elastic
PED > 1
Change in price has a big effect on the change in quantity demanded. A slight increase/decrease will drastically change the quantity demanded
Inelastic
Change in price has small effect on the change in quantity demanded. An increase/decrease in price won't change the quantity demanded, or will only change by a little
PED < 1
Perfectly Elastic
PED = infinite
When all that is supplied is sold at a given price
Perfectly Inelastic
PED = 0
A change in price has no effect to the quantity demanded
Factors affecting PED and YED
Nature of the goods
PED
A necessity good tend to have a low PED or inelastic because they are goods that people need to buy, regardless the cost of it.
Comfort good tend to have a high PED or elastic, because their consumption can be postponed for a time period
YED
If the goods are necessities, they tend to be income inelastic because people need to buy it, regardless the cost
If they are comfort goods, they tend to have elastic YED, since people can decide to spend on luxuries later on when their income increase
Availability of substitutes
If there are a lot of alternatives, the product tend to have a high PED, which means elastic.
If there is little alternatives, the product tend to have a lower PED, which means inelastic.
Definition
YED is the responsivenss of quantity demanded towards a change in income
PED is the sensitiveness of quantity demanded towards its change in price
Key Values of YED
Negative YED
Inferior goods tend to decrease in demand as incomes of people increase
YED > 1
Mostly luxury goods, they are income elastic
Positive YED:
Normal goods tend to increase in demand as incomes increase
YED < 1
Mostly necessities, they are income inelastic