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