Price, income, and cross elasticity of demand and supply, and how each is interpreted. Front: the term or formula. Back: definition or formula with a brief usage note.
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- Price elasticity of demand (definition)
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The percentage change in quantity demanded divided by the percentage change in price; measures how responsive consumers are to price changes.- Price elasticity of demand (formula)
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PED = (% change in quantity demanded) / (% change in price), or (dQ/Q) / (dP/P)- Elastic demand (PED > 1)
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Quantity demanded changes by a larger percentage than price changes; consumers are very responsive to price changes.- Inelastic demand (PED < 1)
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Quantity demanded changes by a smaller percentage than price changes; consumers are not very responsive to price changes.- Unit elastic demand (PED = 1)
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Quantity demanded changes by exactly the same percentage as price changes; the percentage changes are equal in magnitude.- Perfectly elastic demand (PED = infinity)
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Consumers will buy any quantity at one price but zero quantity at any higher price; horizontal demand curve.- Perfectly inelastic demand (PED = 0)
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Quantity demanded does not change at all when price changes; consumers buy the same amount regardless of price; vertical demand curve.- How availability of substitutes affects price elasticity of demand
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More substitutes available makes demand more elastic (PED rises) because consumers can easily switch to alternatives when price rises.- How necessity vs luxury affects price elasticity of demand
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Necessities have inelastic demand (PED < 1) because people buy them regardless of price; luxuries have elastic demand (PED > 1) because people cut back when prices rise.- How share of budget affects price elasticity of demand
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Goods that take up a larger share of a consumer's budget have more elastic demand (PED is higher) because price changes matter more to the household budget.- How time horizon affects price elasticity of demand
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Demand is more elastic in the long run than the short run because consumers have more time to find substitutes and adjust consumption.- Income elasticity of demand (definition)
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The percentage change in quantity demanded divided by the percentage change in consumer income; measures how demand changes when income changes.- Income elasticity of demand (formula)
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YED = (% change in quantity demanded) / (% change in income), or (dQ/Q) / (dY/Y)- Normal good (income elasticity)
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A good for which demand increases when income increases (YED > 0); most goods are normal goods.- Inferior good (income elasticity)
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A good for which demand decreases when income increases (YED < 0); people buy less as they become richer.
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