Elasticities of Demand
Price Elasticity of Demand (PED)
Income Elasticity of Demand (YED)
Definition
Formula
A measure of the responsiveness of quantity demand according to changes in price.
Key Values
Formula
Key Values
Definition
A measure of the responsiveness of quantity demand according to changes in income.
%change in quantity demanded of a product / %change in price of that product
PED = 1, Unit elastic | demand response is equal to price change
PED = >1, Elastic | demand response is more than proportionate to change in price
PED = 0 - 1, Inelastic | price changes changes demand very slightly
PED = infinite, perfectly elastic | an increase in price will drop demand to zero
PED = 0, Perfectly inelastic | price changes don't affect demand
% change in quantity demanded / % change in income
YED = (-), Inferior good | Goods that are purchased less when income increases
YED = <1 Necessities (income inelastic) | Day to day mandatory purchases
YED = (+), Normal good | Goods that are purchased more when income increases
YED = >1, Luxuries and services (income elastic) | Purchases that aren't necessary, only for pleasure satisfaction
Factors Affecting Value
Substitutes
Nature of the good
Necessities like water are inelastic as it's required to survive, people wouldn't mind paying more to live.
On the other hand, non necessary luxuries may be more elastic, as these aren't a prioritized purchase
Goods with a lot of substitutes tend to be elastic, as if one good's price increases, people could buy the other options
On the other hand goods with little to no substitutes would be inelastic, as if the price increases, people would have little to no choice but to purchase it