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• Elasticity Of Demand
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Demand curve - Price elasticity of demand (PED)
If the PED is between zero and 1,
demand is said to be inelastic; if PED
equals 1, the demand is unitary elastic;
and if the Price elasticity of demand is
greater than 1, demand is elastic
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Price elasticity of demand
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'Price elasticity of demand' ('PED' or 'Ed') is a
measure used in economics to show the
responsiveness, or elasticity
(economics)|elasticity, of the quantity
demanded of a good or service to a change
in its price. More precisely, it gives the
percentage change in quantity demanded in
response to a one percent change in price
(ceteris paribus, i.e. holding constant all the
other determinants of demand, such as
income). It was devised by Alfred Marshall.
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Price elasticity of demand - Definition
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It is a measure of responsiveness of the
quantity of a raw good or service
demanded to changes in its price.Png,
Ivan (1989). p.57. The formula for the
coefficient of price elasticity of demand for
a good is:Parkin; Powell; Matthews (2002).
pp.74-5.Gillespie, Andrew (2007).
p.43.Gwartney, Yaw Bugyei-Kyei.James
D.; Stroup, Richard L.; Sobel, Russell S.
(2008). p.425.
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Price elasticity of demand - Definition
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Because the PED is negative for the
vast majority of goods and services,
however, economists often refer to
price elasticity of demand as a
positive value (i.e., in absolute value
terms).
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Price elasticity of demand - Definition
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The latter type of elasticity measure is
called a Cross-price elasticity of
demand|cross-price elasticity of
demand.Ruffin; Gregory (1988)
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Price elasticity of demand - Point-price elasticity
In terms of partial-differential calculus,
point-price elasticity of demand can be
defined as follows:Mas-Colell; Winston;
Green (1995). let \displaystyle x(p,w) be
the demand of goods x_1,x_2,\dots,x_L as
a function of parameters price and wealth,
and let \displaystyle x_l(p,w) be the
demand for good \displaystyle l. The
elasticity of demand for good \displaystyle
x_l(p,w) with respect to price p_k is
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Wealth elasticity of demand
'Wealth elasticity of demand' in
microeconomics is the proportional change in
the consumption of a good (economics)|good
relative to a change in consumers' Wealth
(economics)|wealth (as distinct from changes
in personal income#Meaning in economics
and use in economic theory|income).
Measuring and accounting for the variability
in this Elasticity (economics)|elasticity is a
continuing problem in behavioral finance and
consumer theory.
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Wealth elasticity of demand - Definition
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This is analogous to the definition of
the income effect from the income
elasticity of demand, or the
substitution effect from the price
elasticity
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Market power - Market power and elasticity of demand
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The relationship between market power
and the price elasticity of demand (PED)
can be summarized by the equation:
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Cross elasticity of demand
For example, if, in response to a 10%
increase in the price of fuel, the demand of
new cars that are fuel inefficient
decreased by 20%, the cross elasticity of
demand would be:
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Cross elasticity of demand
Therefore, if the price of product B
decreases, then the demand curve for
product A shifts to the right, increasing A's
demand, resulting in a negative value for
the cross elasticity of demand
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Cross elasticity of demand - Formula
The formula used to calculate
the coefficient cross elasticity of
demand is
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Income elasticity of demand
In economics, 'income Elasticity
(economics)|elasticity of Supply and
demand|demand' measures the
responsiveness of the demand for a good to
a change in the income of the people
demanding the good, ceteris paribus. It is
calculated as the ratio of the percentage
change in demand to the percentage change
in income. For example, if, in response to a
10% increase in income, the demand for a
good increased by 20%, the income elasticity
of demand would be 20%/10% = 2.
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Income elasticity of demand - Interpretation
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* A negative income elasticity of demand
is associated with inferior goods; an
increase in income will lead to a fall in the
demand and may lead to changes to more
luxurious substitutes
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Income elasticity of demand - Interpretation
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* A positive income elasticity of demand is
associated with normal goods; an increase
in income will lead to a rise in demand. If
income elasticity of demand of a
commodity is less than 1, it is a necessity
good. If the elasticity of demand is greater
than 1, it is a luxury good or a superior
good.
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Income elasticity of demand - Interpretation
* A zero income elasticity of demand
occurs when an increase in income is not
associated with a change in the demand of
a good. These would be sticky
(economics)|sticky goods.
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Income elasticity of demand - Interpretation
Income elasticity of demand can be
used as an indicator of industry
health, future consumption patterns
and as a guide to firms investment
decisions. For example, the selected
income elasticities below suggest that
an increasing portion of consumer's
budgets will be devoted to purchasing
automobiles and restaurant meals and
a smaller share to tobacco and
margarine.Frank, Robert (2008). p. 125
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