ElasticitiesKanako Nakagawa

Price Elasticity of Demand

Price Elasticity of Demand (PED): a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

PED = (% change in quantity demanded) / (% change in price) Elastic demand: a change in the price of a good or service

will cause a proportionately larger change in the quantity demanded.

Inelastic demand: a change in the price of a good or service will cause a proportionately smaller change in quantity demanded.

Price Elastic DemandPri

ce

QuantityQ1

P1

P2

Q2

PED>1

D

Price Inelastic DemandPri

ce

QuantityQ1

P1

P2

Q2

PED<1

D

Perfectly Elastic DemandPri

ce

Quantity

P1

PED=infinity

D

Perfectly Inelastic Demand

Pri

ce

QuantityQ1

PED=0

D

Cross Elasticity of Demand

Cross Elasticity of Demand (XED): a measure of the responsiveness of the demand for a good or service to a change in the price of a related good.

XED = (% change in quantity demanded for X) / (% change in price of Y) Substitute goods: goods that can be used instead of each

other, such as pepsi and coke. They have positive XED Complement goods: goods which are used together, such

as oreo and milk. They have negative XED.

Income Elasticity of Demand

Income Elasticity of Demand (YED) a measure of the responsiveness of demand for a good to change in income.

YED = (% change in quantity demanded) / (% change in income) Normal good: has a positive YED. As income rises,

demand increases. Inferior good: has a negative YED. As income rises,

demand decreases.

Price Elasticity of Supply

Price Elasticity of Supple (PES): a measure of the responsiveness of the quantity supplied of a good or service to a change in its price.

PES = (% change in quantity supplied) / (% change in price)

Tax

Indirect tax: an expenditure tax on a good or service. An indirect tax is shown on a supply and demand diagram as an upward shift in the supply curve, where the vertical distance between the two supply curves represents the amount of tax.

Specific tax: shown as a parallel shift.

Ad Valorem tax: shown as a divergent shift.

Incidence (burden): incidence of a tax is the amount of tax paid by the producer/consumer. If the demand for a good is inelastic the greater incidence of the tax falls on the consumer. If the demand for a good is elastic, the greater incidence of the tax falls on the producer.