Topic Videos

# Coefficients of Elasticity of Demand

- Level:
- AS, A-Level, IB, BTEC National, BTEC Tech Award

- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 4 Nov 2019

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

**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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Study Notes