# Elasticity of demand and supply

## Elasticity of demand and supply

### Elasticity of Demand

• Elasticity of demand measures the responsiveness of quantity demanded for a good or service to a change in its price, ceteris paribus.
• Price elasticity of demand (PED) is calculated using the formula: % change in quantity demanded ÷ % change in price.
• If PED > 1, demand is elastic. This means a change in price results in a larger percentage change in quantity demanded.
• If PED < 1, demand is inelastic. A change in price results in a smaller percentage change in quantity demanded.
• If PED = 1, demand is unit elastic. A change in price leads to a proportional change in quantity demanded.
• Factors affecting PED include availability of substitutes, necessity of the good, time period and proportion of income spent on the good.

### Income Elasticity of Demand

• Income elasticity of demand (YED) measures the responsiveness of demand to a change in consumer income.
• It’s calculated as: % change in quantity demanded ÷ % change in income.
• If YED > 0, the good is a normal good. As income increases, demand for the good increases.
• If YED < 0, the good is an inferior good. As income increases, demand for the good decreases.
• Normal goods can be further classified into necessities (0 < YED < 1) and luxuries (YED > 1).

### Cross Elasticity of Demand

• Cross elasticity of demand (XED) measures the responsiveness of demand for one good to a change in price of another good.
• Calculated by the formula: % change in quantity demanded of good A ÷ % change in price of good B.
• If XED is positive, the two goods are substitutes. An increase in price of one leads to an increase in demand for the other.
• If XED is negative, the goods are complements. An increase in price of one reduces demand for the other.

### Elasticity of Supply

• Elasticity of supply measures the responsiveness of quantity supplied to a change in price of a good or service.
• Price elasticity of supply (PES) equals % change in quantity supplied ÷ % change in price.
• If PES > 1, supply is elastic. Producers can increase production significantly in response to price increases.
• If PES < 1, supply is inelastic. Production is insensitive to price changes.
• Factors influencing elasticity of supply include time period, mobility of factors of production, unused capacity and rate of increase in costs.