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Student videos

Coefficients of Elasticity of Demand

  • Levels: AS, A Level, IB, BTEC Level 3, BTEC Tech Award
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

In this topic video we cover the relevance of the coefficients of three different elasticities of demand (PED, YED and XED).

Coefficients of Elasticity of Demand

Coefficients:

Coefficient means value

  • Elasticity is a number!
  • Coefficient could be high – elastic
  • Or it might be low – inelastic
  • Or zero – perfectly inelastic
  • Or infinity – perfectly elastic

Price elasticity of demand

Formula: Ped = % change in quantity demanded of good X / % change in price of good X

PED will normally be negative – i.e. inverse relationship between quantity demanded and a change in the price

IMPORTANT! New specs require students to include the minus or plus signs along with the coefficient

  • If PED = 0, demand is perfectly price inelastic
  • If PED <1, demand is price inelastic
  • If PED > 1, demand is price elastic
  • If PED = infinity, demand is perfectly price elastic
  • If PED = 1, demand is unitary elastic

Income elasticity of demand

Income elasticity of demand (YED) measures the responsiveness of quantity demanded for a product to a change in income

Formula: YED = % change in quantity demanded / % change in income

  • For normal necessity products: YED is positive but coefficient < +1
  • For normal luxury products: YED is positive but coefficient > +1
  • For inferior products: YED is negative (YED<0)

Cross price elasticity of demand

  • Cross price elasticity of demand (XED) measures the percentage change in quantity demanded for Good A after a change in the price of another product, Good B
  • Substitute goods (in competitive demand) have a positive cross-elasticity of demand.
  • Complement goods (in joint demand) will have a negative cross elasticity of demand
  • The higher the coefficient in both cases, the stronger is the cross-price relationship between two products
  • Unrelated goods will have a cross-price elasticity of demand of zero.

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