Lesson 1 of 0
In Progress
1.2.1.9 Types of elasticity: price, income and cross elasticity
Elasticity measures the responsiveness of the quantity demanded or quantity supplied of a good or service to changes in its determinants, such as price, income, or the price of related goods. There are three main types of elasticity:
- Price Elasticity of Demand (PED): Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good or service to changes in its price. It is the most commonly discussed form of elasticity and is used to understand how changes in price affect consumer behavior. As mentioned earlier, PED can be classified into three categories:
- Elastic Demand (PED > 1): Quantity demanded is highly responsive to changes in price.
- Inelastic Demand (0 < PED < 1): Quantity demanded is less responsive to changes in price.
- Unitary Elastic Demand (PED = 1): Percentage change in quantity demanded is equal to the percentage change in price.
The PED formula is:
PED = (% Change in Quantity Demanded) / (% Change in Price)
- Income Elasticity of Demand (YED): Income Elasticity of Demand (YED) measures the responsiveness of the quantity demanded of a good or service to changes in consumer income. It helps in understanding the impact of changes in income on consumer spending patterns. YED can be categorized as follows:
- Normal Goods (YED > 0): Quantity demanded increases as income increases.
- YED > 1: Luxury goods (income elastic).
- 0 < YED < 1: Necessity goods (income inelastic).
- Inferior Goods (YED < 0): Quantity demanded decreases as income increases.
The YED formula is:
YED = (% Change in Quantity Demanded) / (% Change in Income)
- Cross Elasticity of Demand (XED): Cross Elasticity of Demand (XED) measures the responsiveness of the quantity demanded of one good to changes in the price of another related good. It helps in understanding the relationship between different goods in the market. XED can be classified as follows:
- Substitutes (XED > 0): Quantity demanded of one good increases as the price of a substitute good increases.
- Complements (XED < 0): Quantity demanded of one good increases as the price of a complementary good decreases.
- Unrelated Goods (XED = 0): Quantity demanded of one good is not influenced by changes in the price of another unrelated good.
The XED formula is:
XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)