Price Elasticity of Demand Price Elasticity of Supply

the resposiveness of demand after a change in the goods price

% chg in qty demanded

chg in Price
RESULTS

% chg in qty supplied

% chg in price

FACTORS affecting PED

Substitutes
Income
Cost of substitution is to high , demand will remain inelastic
Brand loyalty / habit forming goods
Necessity / Luxury Good

Cross elasticity of demand Income elasticity of demand

Cross elasticity of demand (XED) is the responsiveness of demand for
Income elasticity of demand measures the relationship
between a change in quantity demanded for good X and a
one product to a change in the price of another product. Many products
change in real income. The formula for calculating income
are related, and XED indicates just how they are related.
elasticity is:

% change in quantity demanded (good A) % change in demand

% change in price (good B) % chg in income
Substitutes
When XED is positive, the related goods are substitutes. For example, if
Most products have a positive income elasticity of demand.
the price of Coca Cola increases from 50p to 60p per can, and the
So as consumers' income rises more is demanded at each
demand for Pepsi Cola increases from 1m to 2m per year, the XED
price.
between the two products is:
+100 / +20= (+) 5.0
1.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
income.
The positive sign means that the two goods are substitutes, and because
the coefficient is greater than one, they are regarded as close
substitutes.
Complements
When XED is negative, the goods are complementary products. The
equation is the same as for substitutes.
For example, if the price of Cinema Tickets increases from £5.00 to
£7.50, and the demand for Popcorn decreases from 1000 tubs to 700,
the XED between the two products will be:
– 30 / + 50= (-) 0.6
The negative sign means that the two goods are complements
2.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 restaurant meals.
The income elasticity of demand in this example is +1.25.
However, there are some products (economists call them
"inferior goods")e.g. Mass transport , Beer ,takeaway pizza
which have a negative income elasticity of demand, meaning
that demand falls as income rises.
The income elasticity of demand is usually strongly positive
for Fine wines and spirits, high quality chocolates (e.g. Lindt)
and luxury holidays overseas