Elasticity

Price, income and cross elasticity of demand, and price elasticity of supply, with their calculations and uses.

Elasticity measures how responsive one variable is to a change in another.

Price elasticity of demand (PED)

$\text{PED} = \frac{\%\,\Delta \text{quantity demanded}}{\%\,\Delta \text{price}}$

|\text{PED}| > 1

: elastic (responsive);

|\text{PED}| < 1

: inelastic;

= 1

: unit elastic.

PED is usually negative (downward demand); we often quote the magnitude.

Worked example. Price rises $10\%$ and quantity demanded falls $20\%$ . $\text{PED} = \dfrac{-20}{10} = -2$ — elastic.

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Price elasticity of demand (PED)

\text{PED} = \frac{\%\,\Delta \text{quantity demanded}}{\%\,\Delta \text{price}}

|\text{PED}| > 1

: elastic (responsive);

|\text{PED}| < 1

: inelastic;

= 1

: unit elastic.

PED is usually negative (downward demand); we often quote the magnitude.

Worked example. Price rises

10\%

and quantity demanded falls

20\%

\text{PED} = \dfrac{-20}{10} = -2

— elastic.