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.