2.5 Elasticities of demand

• Elasticity measures responsiveness between economic variables

• Diagram: relatively elastic and relatively inelastic demand

• PED equals percentage change in quantity demanded divided by percentage change in price

• PED has a theoretical range of values and indicates responsiveness of demand to price

• Calculation: PED, change in price, quantity demanded, or total revenue from data

• PED can be perfectly elastic, perfectly inelastic, unitary, elastic, or inelastic

• PED affects total revenue when price changes

• Diagram: constant PED cases and unitary PED along a demand curve

• Diagram: revenue changes when demand is price elastic or price inelastic

• PED depends on number and closeness of substitutes, necessity, income proportion, and time

• PED matters for firm pricing and government decision-making

• YED equals percentage change in quantity demanded divided by percentage change in income

• Positive YED identifies normal goods; negative YED identifies inferior goods

• YED below one is typical of necessities; YED above one is typical of services and luxury goods

• Diagram: income elastic, income inelastic, and inferior goods on an Engel curve

• Calculation: YED, change in income, or quantity demanded from data