Elasticity Of Demand

• Elasticity Of Demand

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Demand curve - Price elasticity of demand (PED)

1 If the PED is between zero and 1, demand is said to be inelastic; if PED

equals 1, the demand is unitary elastic; and if the Price elasticity of

demand is greater than 1, demand is elastic


Price elasticity of demand

1 'Price elasticity of demand' ('PED' or 'Ed') is a measure used in economics to show the

responsiveness, or elasticity (economics)|elasticity, of the quantity demanded of a

good or service to a change in its price. More precisely, it gives the percentage change in

quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). It was devised

by Alfred Marshall.


Price elasticity of demand - Definition

1 It is a measure of responsiveness of the quantity of a raw good or service

demanded to changes in its price.Png, Ivan (1989). p.57. The formula for the

coefficient of price elasticity of demand for a good is:Parkin; Powell; Matthews

(2002). pp.74-5.Gillespie, Andrew (2007). p.43.Gwartney, Yaw Bugyei-Kyei.James D.; Stroup, Richard L.; Sobel, Russell S.

(2008). p.425.



1 Because the PED is negative for the vast majority of goods and services, however, economists often refer to

price elasticity of demand as a positive value (i.e., in absolute value

terms).



1 The latter type of elasticity measure is called a Cross-price elasticity of demand|cross-price elasticity of demand.Ruffin; Gregory (1988)


Price elasticity of demand - Point-price elasticity

1 In terms of partial-differential calculus, point-price elasticity of demand can be defined as follows:Mas-Colell; Winston;

Green (1995). let \displaystyle x(p,w) be the demand of goods x_1,x_2,\dots,x_L as a function of parameters price and wealth,

and let \displaystyle x_l(p,w) be the demand for good \displaystyle l. The

elasticity of demand for good \displaystyle x_l(p,w) with respect to price p_k is


Wealth elasticity of demand

1 'Wealth elasticity of demand' in microeconomics is the proportional change in the consumption of a good (economics)|good

relative to a change in consumers' Wealth (economics)|wealth (as distinct from changes

in personal income#Meaning in economics and use in economic theory|income).

Measuring and accounting for the variability in this Elasticity (economics)|elasticity is a

continuing problem in behavioral finance and consumer theory.


Wealth elasticity of demand - Definition

1 This is analogous to the definition of the income effect from the income

elasticity of demand, or the substitution effect from the price

elasticity


Market power - Market power and elasticity of demand

1 The relationship between market power and the price elasticity of

demand (PED) can be summarized by the equation:


Cross elasticity of demand

1 For example, if, in response to a 10% increase in the price of fuel, the

demand of new cars that are fuel inefficient decreased by 20%, the

cross elasticity of demand would be:


Cross elasticity of demand

1 Therefore, if the price of product B decreases, then the demand curve

for product A shifts to the right, increasing A's demand, resulting in a negative value for the cross elasticity

of demand


Cross elasticity of demand - Formula

1 The formula used to calculate the coefficient cross elasticity

of demand is


Income elasticity of demand

1 In economics, 'income Elasticity (economics)|elasticity of Supply and demand|demand' measures the responsiveness of the

demand for a good to a change in the income of the people demanding the good, ceteris

paribus. It is calculated as the ratio of the percentage change in demand to the

percentage change in income. For example, if, in response to a 10% increase in income, the

demand for a good increased by 20%, the income elasticity of demand would be 20%/10%

= 2.https://store.theartofservice.com/the-elasticity-of-demand-toolkit.html

Income elasticity of demand - Interpretation

1 * A negative income elasticity of demand is associated with inferior goods; an increase in income will

lead to a fall in the demand and may lead to changes to more luxurious

substitutes



1 * A positive income elasticity of demand is associated with normal goods; an increase in income will

lead to a rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater

than 1, it is a luxury good or a superior good.



1 * A zero income elasticity of demand occurs when an increase in income is not associated with a change in the demand of a good. These would be

sticky (economics)|sticky goods.



1 Income elasticity of demand can be used as an indicator of industry health, future consumption patterns and as a guide to firms investment decisions. For example,

the selected income elasticities below suggest that an increasing portion of

consumer's budgets will be devoted to purchasing automobiles and restaurant

meals and a smaller share to tobacco and margarine.Frank, Robert (2008). p. 125


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Elasticity Of Demand