📚 Cambridge A‑Level Economics 9708 – Elasticity of Demand
What is Elasticity?
Elasticity measures how much the quantity demanded of a good changes when something else changes. Think of it like a rubber band: the more you stretch it, the more it changes shape.
1️⃣ Price Elasticity of Demand (PED)
Shows how much the quantity demanded changes when the price changes.
Formula (in LaTeX):
\$PED = \dfrac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\$
- Elastic (|PED| > 1) – big response to price change. Example: fancy sneakers – a small price drop causes a big increase in sales. 📉➡️📈
- Inelastic (|PED| < 1) – small response. Example: salt – price changes don’t affect how much you buy. 🧂
- Unitary (|PED| = 1) – proportional change. Example: a 10% price drop leads to a 10% increase in quantity. ⚖️
2️⃣ Income Elasticity of Demand (YED)
Shows how quantity demanded changes when a consumer’s income changes.
Formula:
\$YED = \dfrac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\$
- Positive YED (> 0) – normal goods. When income rises, people buy more. Example: organic food. 🌱
- Negative YED (< 0) – inferior goods. When income rises, people buy less. Example: instant noodles. 🍜
- Large positive YED (> 1) – luxury goods. Big income jump leads to a huge increase in demand. Example: luxury cars. 🚗💨
- YED between 0 and 1 – necessities. Demand rises but not as fast as income. Example: basic clothing. 👕
3️⃣ Cross‑Price Elasticity of Demand (XED)
Shows how quantity demanded of one good changes when the price of another good changes.
Formula:
\$XED = \dfrac{\% \text{ change in quantity demanded of Good A}}{\% \text{ change in price of Good B}}\$
- Positive XED – substitutes. If the price of coffee goes up, tea sales might rise. ☕️➡️🍵
- Negative XED – complements. If the price of printers falls, printer ink sales go up. 🖨️➡️🖋️
Why Relative Percentage Changes Matter
Using percentages keeps the measure scale‑free – it works for any size of market or price. It’s like comparing how much a plant grows relative to its own size, not just the absolute number of leaves.
The Size and Sign of the Income Elasticity Coefficient
Understanding the sign (+ or –) tells you whether a good is normal or inferior. The magnitude tells you how sensitive demand is to income changes.
| YED Value | Interpretation | Example Good |
|---|
| > 1 | Luxury good – demand rises faster than income. | Designer handbags. |
| 0 < YED < 1 | Necessity – demand rises but slower than income. | Basic groceries. |
| 0 | Neutral – demand unchanged by income. | Public transport passes. |
| < 0 | Inferior good – demand falls as income rises. | Instant noodles. |
Quick Quiz Time! 🎓
- What would you expect the YED of a new electric bike to be if it’s considered a luxury item? (Hint: > 1)
- When the price of a movie ticket goes up, the demand for popcorn usually increases or decreases? (Substitute or complement?)
- Explain in one sentence why using relative percentage changes (percentages) is better than absolute changes when measuring elasticity.
Key Takeaways
- Elasticity tells us how “stretchy” demand is to price, income, or another good’s price.
- Positive coefficients mean “more when something else goes up”; negative means “less when something else goes up.”
- Income elasticity helps identify whether a good is a luxury, necessity, or inferior.
- Use percentages to keep the measurement comparable across different markets.
Remember!
Think of elasticity like a rubber band: the more you stretch (change in price/income), the more the band (quantity demanded) will stretch or shrink. The color of the band (sign) tells you if it’s a normal or inferior good, and the thickness (magnitude) tells you how sensitive it is.