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Elasticity
| Term | Definition |
|---|---|
| Elasticity | is a measure of responsiveness (sensitivity) of the quantity demanded of a good to a change in some variable. |
| Price Elasticity of Demand(PED) | measures the percentage/proportionate change in quantity demanded of a good caused by the percentage/proportionate change in the price of a good itself |
| A good is Relatively Elastic | when the proportionate/percentage change in quantity demanded of a good is greater than the proportionate/percentage change in the price of a good itself. |
| A good is Perfectly Elastic | when any increase in the price of that good results in its quantity falling to zero. |
| A good is said to be Unitary Elastic | when the proportionate/percentage change in the quantity demanded of a good is equal to the proportionate/percentage change in the price of that good. |
| A good is Relatively Inelastic | if the proportionate/percentage change in quantity demanded of a good is less that the proportionate/percentage change in price of that good. |
| A good is Perfectly Inelastic | if the proportionate/percentage change in the price of a good causes no change in the quantity demanded of that good. |
| For normal goods, PED is usually | negative (-), i.e. As price increase (+), quantity demanded falls (-) and vica versa. |
| For giffen goods, PED is | positive (+). This is because price and demand travel in the same direction, i.e. If price increases, the quantity demanded also increases and vica versa. |
| Factors affecting PED | The availability of close substitutes,Complementary goods,Is the commodity a luxury or necessity?, The proportion of income that is spent of the commodity, The durability of the commodity, Expectations as to future changes in price, The length of time all |
| Importance of Understanding Elasticity | Importance in taxation policy/minister for finance, Importance to business people, Use in International Trade. |
| Cross Elasticity of Demand(CED) | measures the proportionate/percentage change in the quantity demanded for one good caused by the proportionate percentage change in the price of another good. |
| For substitute goods, CED is | positive |
| For complementary goods, CED is | negative |
| Income Elasticity of Demand(YED) | measures the proportionate/percentage change in the quantity demanded for a good caused by the proportionate/percentage change in income (Y) of consumers. |
| For normal goods,YED is | positive |
| For inferior goods,YED is | negative |
| Price Elasticity of Supply(PES) | measures the relationship between proportionate/percentage change in quantity supplied and proportionate change in price. |
| PES is usually | positive, as an increase in its own price (+) will normally lead to an increase in the quantity supplied. |
| A good is elastic supply | when the proportionate/percentage change in quantity supplied is greater that the proportionate change in price |
| A good is inelastic supply | when a change in price of the good causes less than a proportionate change in quantity supplied of a good. |
| Factors that affect Elasticity of Supply: | Firms capacity, Mobility of the factors of production, Time period, Nature of the product, Storage costs, Cost conditions, Products in joint supply, Stock. |
Created by:
deborahh
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