Types of Elasticity

Elasticity is the measure of sensitivity/responsiveness of quantity demanded of a good/service in relation to another variable. This variable has the ability to be different and in this article, we will be looking at four different types of elasticity. These are the following:

  • Price Elasticity of Demand (PED)
  • Income Elasticity of Demand (YED)
  • Cross Elasticity of Demand (XED)
  • Price Elasticity of Supply (PES)

ELASTICITY

When all the numbers have been inputted into the formula, you will be able to get three different numerical answers. You will either get a number >1 meaning it is elastic, <1 meaning it is inelastic and =1 meaning unity.

An elasticity that is >1 means it is an elastic good, this means that a small change in the variable of price/income/price of a different good/supply leads to a big change in the quantity demanded of that good. An example of an elastic good is wine, if there is a small increase in the price of wine, there will be a high decrease in the quantity demanded of it as it isn’t deemed a necessity by consumers.

 An elasticity that is <1 means it is an inelastic good, this means that a small change in the variable of price/income/price of a different good/supply leads to little change in the quantity demanded of that good. An example of an inelastic good is petrol, in recent years the price of petrol/gasoline has increased like never before, yet demand has remained pretty stable for the good.

An elasticity that is =1 means it is in unity, this means that a small change in the variable of price/income/price of a different good/supply leads to an identically small change in the quantity demanded of that good. For example, if the price increased by 20%, the quantity demanded would decrease by 20%. Unlike the other two elasticities, there are no real life examples to show unitary elasticity because it is incredibly hard to come across a change in the price/income/supply/different good that is the identical to quantity demanded.


Price Elasticity of Demand (PED)

Price elasticity of demand is the responsiveness in the change of quantity demanded of a good/service in relation to a change in the price of that good.

The formula for Price Elasticity of Demand is:

PED = (% change in QUANTITY DEMANDED)/(% change in PRICE OF GOOD)


EXAMPLE


Income Elasticity of Demand (YED)

Price elasticity of demand is the responsiveness in the change of quantity demanded of a good/service in relation to a change in a consumers income.

The formula for Income Elasticity of Demand is:

YED = (% change in INCOME)/(% change in PRICE OF GOOD)


EXAMPLE

The annual income of a household rises from £50,000 to £60,000. Because of this their consumption of takeaways rises from 50 days to 70 days of takeaway dinners. Using a calculation, explain what this tells you about the household’s income elasticity of demand for takeaway food.


Cross Elasticity of Demand (XED)

Price elasticity of demand is the responsiveness in the change of quantity demanded of a good/service in relation to a change in the price of another good.

XED = (% change in QUANTITY DEMANDED OF GOOD A)/(% change in PRICE OF GOOD B)


EXAMPLE

The owner of a cinema finds that following a rise in cinema tickets from £5 to £6, the demand for popcorn falls by 5%. Calculate the cross elasticity of demand for popcorn with respect to cinema ticket prices.

XED = -5%/1/5 x 100 = -5/20 = -1/4

  • We have a – next to the 5% because the question says demand for popcorn FALLS by 5%.
  • For the denominator, we have 1/5, because ticket prices are £5, prices increase by £1, which is 20% or 1/5 change in ticket prices,

Price Elasticity of Supply (PES)

Price elasticity of demand is the responsiveness in the change of quantity demanded of a good/service in relation to a change in the supply of that good.

PES = (% change in QUANTITY SUPPLIED)/(% change in PRICE)


Example