THE MICO UNIVERSITY

Grades: 10 & 11 Group Members: Carey Crosdale Natasha Lancaster-Collins Marsha McKenzie

Definition of Elasticity of Demand Price Elasticity

Income Elasticity

Cross Elasticity

Summary

Test

End-Exit

Elasticity of Demand

Price Elasticity of demand (PED) – measure responsiveness, or elasticity , of the quantity demanded of a good or service to a change in its price.

it gives the percentage change in quantity demanded in response to percent change in price.

PED is derived from the percentage change in quantity (%ΔQ d ) and percentage change in price (%ΔP).

Income elasticity of demand measures the relationship between a change in quantity demanded and a change in income.   Eg, household income & purchasing power

Percentage change in quantity demanded of good X divided by the percentage change in real consumers' income

Perfectly Elastic – It is traced when, a small changes in price leads to a very substantial change in quantity of demand. It is numerically defined as Ep=α. Curve is parallel to X axis of perfectly elastic

  Cross Elasticity measures the responsiveness of the demand for a good to a change in the price of another good.

It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good.

Formula

P 1 P 2 Q 1 Q 2 Quantity Q S 1 S 2 If proportionate change in quantity demanded is great than the proportionate change is price then, relatively elastic is greater than 1. We can indicate it as EP>1. We can say a small change in price leads to a big change in quantity demanded. In the case of increase or decrease we can say demand is relatively elastic.

 Elasticity refers to the reaction or response of the consumers to change in prices of goods and services. Elasticity of demand also may depend on the relative change in quantity and price. Buyers may tend to reduce their purchases as price increases, and tend to increase their purchases when price decreases.  The change in price is not the only factor that may change the reaction of consumers. The nature of the product (similarity to what he uses) and the particular needs of the consumer (whether important or not) may also affect the change in the reaction or response of consumer.  Demand may be elastic or inelastic. Demand is likely to be elastic when: want is not urgent, close substitutes are available, goods is durable or repairable, goods has multiple uses. On the other hand, demand is likely to be inelastic when: want is urgent, good substitutes are unavailable, wanted jointly with some complementary item.

1.

Refer to the graphs below. Which demand curve has a value of elasticity equal to zero? The graph on the left. The graph on the right. Both graphs. Neither graph.

2. Refer to the graph below. This demand curve is perfectly elastic because: Quantity demanded is fixed at 20 units. Price does not change, regardless of quantity demanded.

An infinitesimal increase in price above $5 brings quantity demanded down to zero. All of the above.

http://www.ecoteacher.asn.au/Demand/elastsli/e1.htm

http://www.investorwords.com/1396/demand.html

http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm

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