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Elasticity

Elasticity in economics measures the responsiveness of one variable to changes in another variable. It is often used to analyze how quantity demanded or supplied changes in response to price changes.

Price Elasticity of Demand (PED)

Measures the responsiveness of the quantity demanded of a good to a change in its price.

  • Formula: Percentage change in quantity demanded divided by the percentage change in price.
  • Elastic Demand (PED > 1): Quantity demanded changes proportionally more than the price change. Consumers are highly responsive to price changes.
  • Inelastic Demand (PED < 1): Quantity demanded changes proportionally less than the price change. Consumers are not very responsive to price changes.
  • Unitary Elastic Demand (PED = 1): Quantity demanded changes proportionally the same as the price change.
  • Perfectly Elastic Demand (PED = ∞): Consumers will buy an infinite quantity at a specific price but zero quantity at a slightly higher price (horizontal demand curve).
  • Perfectly Inelastic Demand (PED = 0): Quantity demanded does not change regardless of the price change (vertical demand curve).
  • Factors Affecting PED:
    • Availability of substitutes
    • Necessity vs. luxury
    • Proportion of income spent on the good
    • Time horizon

Price Elasticity of Supply (PES)

Measures the responsiveness of the quantity supplied of a good to a change in its price.

  • Formula: Percentage change in quantity supplied divided by the percentage change in price.
  • Elastic Supply (PES > 1): Quantity supplied changes proportionally more than the price change. Producers are highly responsive to price changes.
  • Inelastic Supply (PES < 1): Quantity supplied changes proportionally less than the price change. Producers are not very responsive to price changes.
  • Unitary Elastic Supply (PES = 1): Quantity supplied changes proportionally the same as the price change.
  • Perfectly Elastic Supply (PES = ∞): Producers will supply an infinite quantity at a specific price but zero quantity at a slightly lower price (horizontal supply curve).
  • Perfectly Inelastic Supply (PES = 0): Quantity supplied does not change regardless of the price change (vertical supply curve).
  • Factors Affecting PES:
    • Availability of inputs
    • Flexibility of production
    • Time horizon
    • Ability to store goods

Income Elasticity of Demand (YED)

Measures the responsiveness of the quantity demanded of a good to a change in consumer income.

  • Normal Goods (YED > 0): Quantity demanded increases as income increases.
  • Inferior Goods (YED < 0): Quantity demanded decreases as income increases.
  • Luxury Goods (YED > 1): Quantity demanded increases proportionally more than the income increase.

Cross-Price Elasticity of Demand (XED)

Measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

  • Substitutes (XED > 0): The price of one good and the demand for the other good move in the same direction.
  • Complements (XED < 0): The price of one good and the demand for the other good move in opposite directions.
  • Unrelated Goods (XED = 0): The price of one good has no impact on the demand for the other good.
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