3 Price & Income elasticity of demand 17 Flashcards
What does elasticity measure?
It measures the responsiveness of demand to change in a relevant variable - such as price or income
What does Price Elasticity of Demand (PED) measure?
It measures the extent to which the quantity of a product demanded is affected by a change in price
What is the formula to calculate PED?
%Change in Quantity Demanded / %Change in Price
How to calculate the % change?
(Original - New/ Original) x100
Price elastic
Value of PED= more than 1 (ignore the negatives)
Interpreting the elasticity= change in demand is HIGHER than the change in price
Price inelastic
Values of PED= less than 1
Interpreting the elasticity= change in demand is LOWER than the change in price
Unitary price elasticity
Values of PED= Exactly 1
Change in demand = change in price
What does Income Elasticity of Demand measure (IED)?
It measures the extent to which the quantity of a product demanded is affected by a change in income
What is the formula to calculate IED ?
%Change in Quantity Demanded / %Change in Income
Luxuries …
Income elasticity more than 1
As income grows, proportionally more is spent on luxuries
E.g. Expensive holidays, Branded goods
Necessities …
Income elasticity less than 1, but more than 0
As income grows proportionally less is spent on necessities
E.g. Staple groceries (milk), Own-label goods
Limitations using elasticities?
It can be difficult to get reliable data on how demand changes in relation to price
Other factors affect demand (consumer tastes)
Competitors will react - Pricing decisions can’t be taken in isolation
