AIS S1 U03 L01Price, Income and Cross ElasticityRead Pages 46 – 62 Oct 5, 2016Question-Name 3 necessities and 3 luxuries that you would buy.
Elasticity – the conceptWhen price rises, what happens to demand?Demand fallsBUT!How much does demand fall?
Elasticity – the conceptIf price rises by 10% - what happens to demand?We know demand will fallBy more than 10%?By less than 10%?Elasticity measures the extentto which demand will change
Elasticity4 Basic Types Used:Price elasticity of demandPrice elasticity of supplyIncome elasticity of demandCross elasticity
Price Elasticity of Demand
ElasticityPrice Elasticity of DemandThe responsiveness of demand to changes in priceWhere % change in demand is greater than % change in price – elasticWhere % change in demand is less than % change in price - inelastic
ElasticityThe Formula:Ped =% Change in Quantity Demanded___________________________% Change in Price If answer is between 0 and -1: the relationship is inelasticIf the answer is between -1 and infinity: the relationship is elasticNote: 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