Summary
Elasticity measures how responsive demand or supply is to changes in price, income, or the price of other goods. Understanding elasticity helps businesses make informed decisions about pricing and production.
- Price Elasticity of Demand (PED) — a measure of how much the quantity demanded of a good responds to a change in its price. Example: If the price of a product increases by 5% and the demand decreases by 10%, the demand is elastic.
- Income Elasticity of Demand (YED) — a measure of how much the quantity demanded of a good responds to a change in consumers' income. Example: If income increases and demand for restaurant meals rises, the good is considered normal with positive YED.
- Cross Elasticity of Demand (XED) — a measure of how much the quantity demanded of one good responds to a change in the price of another good. Example: If the price of tea increases and demand for coffee rises, the goods are substitutes with positive XED.
Exam Tips
Key Definitions to Remember
- Price Elasticity of Demand (PED)
- Income Elasticity of Demand (YED)
- Cross Elasticity of Demand (XED)
Common Confusions
- Confusing inelastic demand with elastic demand
- Misunderstanding the difference between normal and inferior goods
Typical Exam Questions
- What describes the responsiveness of demand to the change in price? Elastic or inelastic demand
- With the help of diagrams, use the concept of income elasticity of demand to explain the impact of a fall in incomes on the equilibrium price and equilibrium quantity of a normal good and an inferior good? Normal goods see a decrease in demand; inferior goods see an increase.
- Discuss the difficulties that businesses might have when they try to control the factors that determine the price elasticity of demand for a product and consider whether attempts to control these factors are likely to be successful? Factors like substitutes and necessity can be hard to control.
What Examiners Usually Test
- Ability to calculate and interpret elasticity values
- Understanding of factors affecting elasticity
- Application of elasticity concepts to real-world scenarios