AIS S1 U03 L01
Price, Income
and Cross Elasticity
Read Pages 46 – 62
Oct 5, 2016
Question-Name 3 necessities and
3 luxuries that you would buy.

Elasticity – the concept
When price rises, what happens to demand?
Demand falls
BUT!
How much does demand fall?

Elasticity – the concept
If price rises by 10% - what happens to demand?
We know demand will fall
By more than 10%?
By less than 10%?
Elasticity measures the extent
to which
demand will change

Elasticity
4 Basic Types Used:
Price elasticity of demand
Price elasticity of supply
Income elasticity of demand
Cross elasticity

Price Elasticity of Demand

Elasticity
Price Elasticity of Demand
The responsiveness of demand
to changes in price
Where % change in demand is greater than %
change in price –
elastic
Where % change in demand is less than % change
in price -
inelastic

Elasticity
The Formula:
Ped =
% Change in Quantity Demanded
___________________________
% Change in Price
If answer is between 0 and -1: the relationship is inelastic
If the answer is between -1 and infinity: the relationship is
elastic
Note: PED has – sign in front of it; because as price rises
demand falls and vice-versa (inverse relationship between
price and demand)
WE ignore the minus sign