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Price Elasticity of Demand

Price elasticity of demand is a measure of the relationship between a change in the
quantity demanded of a particular good and a change in its price. Price elasticity of
demand is a term in economics often used when discussing price sensitivity. The
formula for calculating price elasticity of demand is:
ChangeQuantity Demanded
Price Elasticity of Demand=
Change Price

1. Inelastic Demand (PED < 1)

The demand is unresponsive to a change in price.

2. Elastic demand (PED > 1)

The demand is highly responsive to a change in price.
3. Perfectly inelastic demand (PED = 0)
The demand does not vary with a change in price.

4. Perfectly elastic demand (PED = )

There is one price at which customers are prepared to pay.
5. Unitary price elasticity of demand (PED =1)

2. Cross Elasticity of Demand

Cross elasticity of demand is an economic concept that measures the responsiveness in the
quantity demand of one good when a change in price takes place in another good. Also called
cross price elasticity of demand, this measurement is calculated by taking the percentage
change in the quantity demanded of one good and dividing it by the percentage change in
price of the other good.
3. Income Elasticity of Demand
Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain
good to a change in real income of consumers who buy this good, keeping all other things
constant. The formula for calculating income elasticity of demand is the percent change in
quantity demanded divided by the percent change in income. With income elasticity of
demand, you can tell if a particular good represents a necessity or a luxury.
Income elasticity=
change income

Normal goods have a positive income elasticity of demand so as consumers' income

rises more is demanded at each price i.e. there is an outward shift of the demand curve

Normal necessities have an income elasticity of demand of between 0 and +1 for

example, if income increases by 10% and the demand for fresh fruit increases by 4%
then the income elasticity is +0.4. Demand is rising less than proportionately to

Luxury goods and services have an income elasticity of demand > +1 i.e. demand
rises more than proportionate to a change in income for example a 8% increase in
income might lead to a 10% rise in the demand for new kitchens. The income
elasticity of demand in this example is +1.25.

Inferior goods have a negative income elasticity of demand meaning that demand falls
as income rises. Typically inferior goods or services exist where superior goods are
available if the consumer has the money to be able to buy it. Examples include the
demand for cigarettes, low-priced own label foods in supermarkets and the demand
for council-owned properties.