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Coefficients of Elasticity of Demand

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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 of Elasticity of Demand


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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