Elasticities of Demand
Elasticity measures the responsiveness of one variable to a change in another. Price Elasticity of Demand (PED) measures how quantity demanded responds to a price change. Income Elasticity of Demand (YED) measures the response to income changes. Cross Price Elasticity of Demand (XED) measures how demand for one good responds to a price change in another. These concepts are essential for understanding consumer behaviour and business pricing decisions.
Key Terms & Definitions
Price Elasticity of Demand (PED)
Measures the responsiveness of quantity demanded to a change in price. PED = % change in Qd ÷ % change in P.
Elastic Demand
When |PED| > 1 — quantity demanded is highly responsive to price changes. Demand curve is relatively flat.
Inelastic Demand
When |PED| < 1 — quantity demanded is not very responsive to price changes. Demand curve is relatively steep.
Unit Elastic
When |PED| = 1 — a given percentage change in price leads to an equal percentage change in quantity demanded.
Income Elasticity of Demand (YED)
Measures the responsiveness of demand to a change in income. YED = % change in Qd ÷ % change in income.
Cross Price Elasticity (XED)
Measures how demand for good A responds to a price change in good B. XED = % change in Qd of A ÷ % change in P of B.
Determinants of PED
Number of substitutes, necessity vs luxury, proportion of income spent, time period, habit-forming nature.
IB Diagram
Accurate IB-style diagram — straight lines, labelled axes
IB Diagram
PED — Elastic vs Inelastic DemandIB standard: straight lines · P on Y-axis · Q on X-axis · labels at end of curves · dashed drop lines to axes
Diagram Notes: Two demand curves side by side: elastic (flat) and inelastic (steep). Show same price change on both and compare the difference in quantity demanded change. Also show TR rectangles (P × Q) before and after price change.