Elasticities

Question 1

What is the price elasticities of demand? What is the calculation?

Answer 1

Measure the responsiveness of quantity demanded given a change in price
%changeQD / %changeP
PED>1 = price elastic
PED<1 = price inelastic
PED = infinity = perfectly price elastic
PED = 1 = unitary price elastic
PED = 0 = perfectly price inelastic

Question 2

What are the conditions of PED?

Answer 2

SPLAT
Substitution
Percentage
Luxury or necessity?
Addictive
Time period

Question 3

What is price elasticity of supply? What is the calculation?

Answer 3

Measures the responsiveness of quantity supplied given a change in price
%changeQS / %changeP
PES>1 = price elastic
PES<1 = price inelastic
PES = 0 =perfectly price inelastic
PES = infinity = perfectly price elastic
PES = 1=unitary price elastic

Question 4

What are the conditions of PES?

Answer 4

PSSST
Production lag
Stocks
Spare capacity
Substitutability of FoPs
Time

Question 5

What is cross elasticity of demand? What is the calculation and meanings?

Answer 5

XED measures the responsiveness of quantity demanded of a g/s, given a change in price of another g/s
%changeQDa/%changePb
+ = subsitutes
- = compliments
XED>1 = price elastic (strong relation)
XED<1 = price inelastic (weak relation)
XED = 0 = perfectly price inelastic (no relation)

Question 6

What is income elasticity of demand? What is the calculation and meanings?

Answer 6

YED measures the responsiveness of a quantity demanded given a change in income
%changeQD/%changeY + = normal good - = inferior good

Normal goods:
YED> 1 = income elastic normal luxury
YED<1 = income inelastic normal necessity
YED = 0 = perfectly income inelastic

Inferior goods:
YED>1 = income elastic
YED<1 = income inelastic