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Summary Price elasticity of demand, supply and income elasticity
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Notes on all price elasticities with relevant diagrams, as well as exam examples with memos at the end of the document
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Elasticity:Measures the sensitivity of goods in response to a change in prices
Price elasticity of demand:
How consumers react to changes in price by changing their demand
Elasticity means: Quantity demanded is sensitive to a change in price. If the elasticity
is 1 or more = very elastic
Inelasticity means: The quantity demanded does NOT change much if the price
changes. If the elasticity is less than 1 = not elastic
PED = % change in quantity demanded/ % change in price
If the % change in price is greater than the % change in demand, the PED will be less than 1.
The price is thus inelastic. (The quantity demanded only falls a little as the price goes up)
If the % change in price is less than the % change in demand, the PED will be more than 1.
The price is thus elastic. (The quantity demanded falls a lot as the price goes up)
If both price and quantity demanded change by the same %, the PED is 1 = unitary
The different forms of elasticity of demand:
1. Perfect price elastic demand
The quantities of a product demanded change by infinite quantity as a result of
any change in price. The demand curve is a straight horizontal line.
PED = infinity
, 2. Price elastic demand
The % change in quantity demanded is greater than the % change in price.
E.G. Increase in price (10%) will lead to a bigger decrease in quantity demanded (20%).
PED = 2
3. Unitary elastic demand
% Change in price will lead to the same % change in the quantity demanded.
Increase in price (20%) will lead to 20% decrease in quantity demanded.
PED = 1
Producers can thus not change their revenue by changing their prices.
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