Elasticities

Price elasticity of demand (PED)

measures how sensitive the quantity demanded is to changes in the price

ELASTIC:
As P increases by 100%, Q decreases by >100%.
Have many substitutes

(http://img.sparknotes.com/figures/5/5259b727009a2736d6ad639bab3494ff/elastic.gif) (http://www.personal.psu.edu/~dxl31/econ102/elastic.png)

INELASTIC:
As P increases by 100%, Q decreases by <100%.
Have few substitutes.

(http://i.investopedia.com/inv/tutorials/site/economics/economics13.gif)

(http://www.personal.psu.edu/~dxl31/econ2/Spring_2000/inelastic.gif)

|PED| > 1 . elastic

|PED| < 1 inelastic

|PED| = 1 . unitary elastic

PED > 0

. Giffen good

Revenue and different elasticities

Elastic demand: increase quantity
Inelastic demand: increase price.
Unitary elasticity: change nothing.

Income elasticity of demand (YED)

Measures the change in demand for a product if there is a change in consumer income (you can
determine what sort of good that good is.
Y income

YED
YED>1
YED = 1
1>YED>0
YED = 0
YED<0

Type of good
elastic
luxury
normal
normal
inelastic
necessary
buying this good does not depend on price at all
inferior

Engel curves
(http://www.intelligenteconomist.com/income-elasticity-of-demandyed/)

A graphical representation of YED

Can be linear, but usually is not; often
looks like a fish

Cross elasticity of demand (XED)

A measure of responsiveness of change in the demand of one product to change of price of another good
Determines, whether goods are substitutes or complements.
(
(
XED
XED > 0
XED = 0
XED < 0

)
)
relationship
substitutes
no
relationship
between
goods
complements

Price elasticity of supply (PES)

A measure of how quantity supplied responds to the price

PES
PES > 1
0 < PES < 1
PES = 0

elastic
inelastic
fixed quantity supplied

Advertising Elasticity of Demand (AED)

A measure of how sensitive the QD is to changes in an organizations advertising expenditure.
AE advertising expenditure

AED
AED > 1

elastic demand

AED < 1

inelastic demand

demand is very sensitive to

advertising
advertising brings more than
proportional change in
demand
demand is insensitive to
advertising
advertising brings less than

proportional change in
demand