The document discusses various concepts of elasticity in economics, including price elasticity of demand and supply, income elasticity, and cross elasticity. It explains how these elasticities are measured, their interpretations, and their implications for consumer behavior and business revenue. Additionally, it highlights the factors affecting elasticity and provides insights into how elasticity can be used in forecasting the impact of taxes on prices.

1. price elasticities of demand and
supply, income and cross elasticities
of demand, and using elasticity to
forecast the impact of taxes on prices
3/21/2020
CPS GLOBAL SCHOOL - IB ECONOMICS- MONICA
UNIT 1.2
ELASTICITIES

2. 3/21/2020
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 Price elasticity
of demand(PED)
% change in quantity demanded
% change in price
= Q2/Q
P2/P
=
Q2P
P2Q
Price
Quantity demanded
P2
Q2
0

3. 3/21/2020
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 PED -> % change in QD resulting from 1%
change in price
 PED is always negative (Inverse relationship b/w
P & QD)
Interpretations:
1. [PED] = 0, No change in QD irrespective of
Price
PERFECTLY INELASTIC Demand

4. 3/21/2020
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2. [PED] is 0<1 INELASTIC Demand
Change in QD< Change in P
Consumer -> Unresponsive to P changes
Few substitutes, Few consumers do not increase or
decrease QD wrto P
3. [PED] = 1 UNIT ELASTIC Demand
Change in QD = Change in P
4. [PED]> 1 ELASTIC Demand
Consumers relatively responsive to P changes
Change in QD> Change in P
5. [PED] = ∞, Perfectly ELASTIC Demand
Any change in P will lead to infinite change in QD

5. 3/21/2020
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P decreases -> Everyone will buy
P increases -> No one buys
Theoretical situation

6. RELATIVE ELASTICITY AND
SLOPE OF THE DEMAND CURVE
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D3 -> Perfectly inelastic (Cigarettes), D4 - > Perfectly elastic
(Movie tickets)
D5 - > Relatively Elastic at Higher Prices and relatively
Inelastic at lower prices (Chocolate ice creams)

7. Determinants of PED: SPLAT
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 S-> No of substitutes
Increase in substitutes-> More Elastic, consumers->switch.
 P-> Propotion of Consumers’s income , the price of a
Good represents.
Cheap Goods-> Less P {eg: Salt}, consumers -> Less
responsive
 L-> Luxury/ Neccesity
Luxury-> elastic-> can live without
Necessity-> inelastic -> We need it. Eg: Electricity, gas
 A-> Addictiveness of a good
Alcohol, cigarettes, tobacco, drugs -> Inelastic. Becomes a
necessity
 T-> Amount of TIME following a price change. Time to
notice a price change.
Short term -> Inelastic,
Long term -> Elastic/ More Responsive

8. Total Revenue (TR)
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 TR = Business Income from the sale of products
 TR = P * Q
Inelastic
E
L
A
S
T
I
c

9. How does a change in “P” affect
business revenues?.
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 At high Prices, Fall in price -> Increase TR
 As price falls, TR eventually maximizes but will
decrease at lower prices.
TOTAL REVENUE AND PED:
Price Total Revenue PED Elastic/Inelasti
c
Increases Increases <1 Inelastic
Increases Decreases >1 Elastic
Decreases Increases > 1 Elastic
Decreases Decreases <1 Inelastic

10. Cross price elasticity of Demand
(XED)
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 Responsiveness of consumers of a particular
good to a change in the price of a related good.
 Consumer’s POV
Goods-> Substitutes, Complements.
FORMULA:
XED = Percentage change in QD of Good A
Percentage change in Price of Good B

11. XED For complements
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 The price of one good has an inverse relationship
with QD of complementary good
 Eg: Oil and new cars(Cars-> Gasoline -> Oil)
 P(Oil) Increases -> P(Gasoline) Increases - >
Demand(new cars) Decreases
 XED = Percentage change in QD of new cars
Percentage change in P of Oil
 XED is always Negative (Inverse relationship b/w
QD and price for a complementary good)

12. XED for Substitutes
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 The price of one good has an direct relationship
with QD of complementary good
 Eg: Oil and Public Transport. Need not carry Oil
for Public Transport
 P(Oil) Increases - > Ppl will demand Public
Transport (PT) -> Demand (PT) Increases
 XED will be Positive

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XED Elasticity Inference
>1 Cross-price Elastic A particular change
in P will lead to a
larger percentage
change in the QD of
the
complementary/suppl
ementary good
<1 Cross-price Inelastic A particular change
in P will lead to a
lesser percentage
change in QD of the
complementary/suppl
ementary good

14. Determinants of XED:
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 Substitutability: More easily substitutable, higher
the XED co-eff
 Dependence: How strongly consumers of one
good depend on the related good

15. Income Elasticity of Demand
(YED)
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 Responsiveness of a consumer’s demand for a
particular good to a change in income
 Increase in Income -> Decrease in Consumption
of a good Inferior Goods - fast food, generic
brand groceries, second-hand clothes, public
transport
 Increase in Income -> Increase in consumption of
a good
Normal Goods – restaurant meals, taxi rides, air
travel
YED = % change in QD for a good
% change in consumer’s income = %

16. 3/21/2020
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 YED = QD2 – QD1
QD1
Y2-Y1
Y1
Y1, QD1 -> Original Income & Original Qty
Demanded
Y2, QD2 -> New Income & New Qty Demanded
following income change
 Y dir prop to QD-> YED is +ve-> NORMAL Good
 Y inversely prop to QD -> YED is –ve ->
INFERIOR Good
 YED-> effects of change in NI on D for a
Particular G/S in a nation as a whole.

17. 3/21/2020
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YED Elasticity Interpretation Type of Good
>1 Elastic Percentage
change in
Income will lead
to a greater
percentage
change in QD
NORMAL
<1 Inelastic Percentage
change in
Income will lead
to a lesser
percentage
change in QD
INFERIOR

18. Applications of YED:
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 For the Firm:
Determine pdn nos based on Income Inc/Dec
Inc Inferior Goods O/P-> Recession
Inc Normal Goods O/P -> Economy is proper
 For the Govt:
YED for G&S produced by nation’s economy
Tax revenue-> largest source -> Income Tax set
Inc/Dec IT-> Inc/Dec Disposable Income-> Inc/Dec
Demand for G&S in a nation
Tax Inc -> Disposable Goods Dec -> Dec in Normal
Goods & Inc in Inferior Goods
Tax Policy – Structured using these details