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Elasticity in economics measures the responsiveness of demand or supply to changes in price or other factors. Key types include Price Elasticity of Demand (PED), Price Elasticity of Supply (PES), Income Elasticity of Demand (YED), and Cross-Price Elasticity of Demand (XED), each with distinct characteristics and determinants. Understanding elasticity is crucial for making informed decisions in taxation, pricing strategies, and resource allocation.

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Elasticity in economics measures the responsiveness of demand or supply to changes in price or other factors. Key types include Price Elasticity of Demand (PED), Price Elasticity of Supply (PES), Income Elasticity of Demand (YED), and Cross-Price Elasticity of Demand (XED), each with distinct characteristics and determinants. Understanding elasticity is crucial for making informed decisions in taxation, pricing strategies, and resource allocation.

Uploaded by

humayunahmedsust
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Elasticity in economics short study notes?

Elasticity in Economics: Short Study Notes


Elasticity refers to the responsiveness of one variable to changes in another. In economics,
elasticity typically measures how much demand or supply of a good responds to changes in
price or other factors.

1. Price Elasticity of Demand (PED)

Definition: Measures how much the quantity demanded of a good changes when its
price changes.

Formula:

% change in quantity demanded


PED =
% change in price
​

Types:

Elastic Demand (PED > 1): A small change in price leads to a large change in
quantity demanded.

Inelastic Demand (PED < 1): A change in price leads to a small change in quantity
demanded.

Unitary Elasticity (PED = 1): The percentage change in demand is equal to the
percentage change in price.

Perfectly Elastic (PED = ∞): Any price change will cause an infinite change in
quantity demanded.

Perfectly Inelastic (PED = 0): Quantity demanded does not change regardless of
price.

Determinants of PED:

Availability of Substitutes: More substitutes → more elastic demand.

Necessities vs. Luxuries: Necessities tend to have inelastic demand, while luxuries
are more elastic.

Time Horizon: Demand is usually more elastic in the long run.

Proportion of Income: Larger proportion of income spent on a good → more elastic


demand.

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2. Price Elasticity of Supply (PES)

Definition: Measures how much the quantity supplied of a good changes when its price
changes.

Formula:

% change in quantity supplied


PES =
% change in price
​

Types:

Elastic Supply (PES > 1): A small change in price causes a large change in quantity
supplied.

Inelastic Supply (PES < 1): A change in price leads to a small change in quantity
supplied.

Unitary Elastic Supply (PES = 1): The percentage change in supply is equal to the
percentage change in price.

Perfectly Elastic Supply (PES = ∞): Any price change leads to an infinite change in
quantity supplied.

Perfectly Inelastic Supply (PES = 0): Supply does not change regardless of price.

Determinants of PES:

Availability of Factors of Production: More factors available → more elastic supply.

Time Period: Supply is generally more elastic in the long run.

Ability to Store Stock: If goods can be stored, supply tends to be more elastic.

3. Income Elasticity of Demand (YED)

Definition: Measures how much the quantity demanded of a good responds to a change
in income.

Formula:

% change in quantity demanded


YED =
% change in income
​

Types:

Normal Goods (YED > 0): As income increases, demand increases.

Inferior Goods (YED < 0): As income increases, demand decreases.

Luxury Goods (YED > 1): Demand increases more than the increase in income.

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4. Cross-Price Elasticity of Demand (XED)

Definition: Measures how much the quantity demanded of one good changes in
response to a change in the price of another good.

Formula:

% change in quantity demanded of good A


XED =
% change in price of good B
​

Types:

Substitute Goods (XED > 0): An increase in the price of one good leads to an
increase in the demand for another.

Complementary Goods (XED < 0): An increase in the price of one good leads to a
decrease in the demand for another.

Unrelated Goods (XED = 0): No relationship between the goods.

5. Elasticity and Total Revenue

Total Revenue = Price × Quantity sold.

Elastic Demand (PED > 1): Price increases lead to a decrease in total revenue, while price
decreases lead to an increase in total revenue.

Inelastic Demand (PED < 1): Price increases lead to an increase in total revenue, while
price decreases lead to a decrease in total revenue.

Unitary Elasticity (PED = 1): Total revenue remains unchanged when the price changes.

6. Applications of Elasticity

Taxation: Governments often tax goods with inelastic demand (e.g., tobacco, fuel) to
maximize revenue.

Pricing Strategies: Firms use elasticity to decide on pricing policies. For example, firms
may lower prices to increase total revenue when demand is elastic.

Subsidies and Price Controls: Elasticity helps policymakers understand the effects of
subsidies and price controls on the market.

Conclusion
Elasticity helps economists and businesses understand how changes in price, income, or
related goods affect the demand and supply of products. By analyzing the elasticity of

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demand and supply, economic agents can make informed decisions about pricing, taxation,
and resource allocation.

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