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ELASTICITY - Coggle Diagram
ELASTICITY
Cross Elasticity of Demand
Measures how demand for one good changes when price of another changes.
Formula: XED = %DQd(A) / %DP(B)
Positive = Substitutes
Negative = Complements
Total Revenue Test
Total Revenue = Price × Quantity
Elastic: Price decrease = Revenue increase
Inelastic: Price increase = Revenue decrease
Unit Elastic: Revenue unchanged
Price Elasticity of Demand
Measures how responsive quantity demanded is to price changes.
Formula: PED = %DQd / %DP
Types: Elastic (>1), Unit (=1), Inelastic (<1)
Price Elasticity of Supply
Measures responsiveness of producers to price changes.
Formula: PES = %DQs / %DP
Elastic (>1), Unit (=1), Inelastic (<1)
Income Elasticity of Demand
Measures responsiveness of demand to income changes.
Formula: YED = %DQd / %DIncome
Positive - Normal goods | Negative - Inferior goods
Determinants of Price Elasticity
• Availability of substitutes
• Proportion of income spent
• Luxury vs necessity
• Time to adjust