What is price elasticity?

Defintion: This is the responsiveness of the quantity demanded or supplied by consumers or producers to a given change in price. 

This is given by the formula:

$PED=\hspace{0.17em}\frac{\%Change Quantity}{\%Change Price}$

Calculating % Change

You can do this by using the formula below:

$\%∆P = \frac{P_2-P_1}{P_1} or\mathit{ }\frac{\mathrm{P}2}{{{\displaystyle P}}_1}\mathit{-}\mathit{1}$

Types of price elasticity

1. Price elasticity of demand
2. Cross elasticity of demand
3. Income elasticity of demand
4. Price elasticity of supply.

Price elasticity of demand

Acronym: PED

Defintion: This is how responsive the quantity demanded by consumers is to a change in price

Formula

$PED=\hspace{0.17em}\frac{\%Change Quantity demanded}{\%Change Price}=\frac{{\displaystyle \frac{Q_2-Q_1}{Q_1}}}{{\displaystyle \frac{P_2-P_1}{P_1}}}$

Range of values of PED and singificance

Value	What it means	Terminolgy	Example
PED>1	% change in Quantity demanded is more than % change in price.	Price elastic demand	High priced luxury goods such as phones.
0<PED<1	% Change in Quantity demanded is less than % change in price	Price inelastic demand	Low priced products such as commodities. E.g corn.
PED = 1	% change quantity is same as % change price. This occurs on an exponential demand curve.	Unitary elastic demand
PED = 0	The quantity demanded does not care about the price. It does not change. Graph is perfectly inelastic (looks like an I as in inelastic).	Perfectly inelastic	Demerit goods. Cigarettes.
PED = Infinite		Perfectly Elastic

Commodities have very inelastic demand because they are inputs into manufacturing and thus have derived demand. They also have very few substitutes (E.g coffee beans have no substitutes)

Determinants of PED

Determinant	Effect	Reason	Examples
Number of subsitute goods and closeness.	More subsititues = Higher elasticity	Lots of similar goods means consumers can easily change product.	Coke and pepsi are elastic.
How well defined it is.	More defined = Higher elasticity	The more defined a product the more subsitutes there are.	Beef has subsitutes like fish, lamb, chicken. But meat has very few subsitutes.
How neccessary a good is	More neccessary = Lower elasticity	If you really want a good you are less likely to care about changes in price.	Addicitive substances or crucial medicine like a cancer drug.
Time period considered	Shorter time perioid = Lower elasticity	If takes time to change your lifestyle to incorporate subitute of a good if the goods price changes.	If you use coal to heat your house and price increases that winter you may stick with it but by the next year you will probably have brought a heater.

Splat (Number of subsidies, proportion of income, luxury or commodity, addiction, time period)

Cross elasticity of demand

Acronym: XED

Definition: This is how responsive the quantity demanded by consumers of product a is to a change in price of product B

This allows to figure out how much the price of one good is able to affect how much consumers want to by another good. This value is a good indicator of how good of a subsitute they are. 

Formula

 

$XED=\hspace{0.17em}\frac{\% change Quantity demanded of product A}{\%Change Price of product B}$

Range of values of XED and singificance

In the case of XED the sign before the value + or - is important. It tells you whether an increase in price will make the other products price go up or down. 

This can let you know if two products are complents or subsitutes, because a price decrease in a product would make it's complementary product's demand go up while it's competitions demand go down. It is logical. 

Value	What it means	Type of good	Example
High positive	A small % increase in price of one good while make the subsitutes good demand increase alot.	Close subsitutes	Competitive brands such as Coke and Pepsi
Low positive	A small % increase in price of one good while make the subsitutes good demand increase a little	Rmeote subsitutes	Not so competive goods like burger king and pizza hut.
XED = 0	Any change in price of one good seems to have no effect on the other goods quantity demanded	Unrelated goods	Any two unrelated goods. Beef and education.
XED is negative	An % increase in price of one good decreases the quantity demanded of the other good. They are likely goods sold together	Complementary goods.	Playstation and ps4 games.

 

income elasticity of demand

Acronym: YED

Definition: This is how responsive the quantity demanded by consumers of a product is to a change in income of the consumers

$YED=\hspace{0.17em}\frac{\% change Quantity demanded of product A}{\%Change Price of product B}$

Value	What it means	Type of good	Example
YED>0	An increase in income of consumers causes them to want to buy more of the good	Normal good	Most goods hence name normal. Expensive goods like sports cars, have high values.
YED<0	An increase in income of consumers causes them to avoid the product	Inferior good	Budget goods. Pubic transport such as the bus, as if you can afford to buy a car you don't need the bus.

Price elasticity of supply

Acronym: PES

Definition: This is how responsive the quantity supplied is to a change in price of a product. 

$PES = \frac{\% change in Quantity supplied }{\% Change in price}$

View count: 5013