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Section 2.2 Elasticities - notes

This unit, with its numbers, will scare some students. Be positive, the maths is easy; the key is to understand what the words mean. It is language, not numbers, that is usually the problem.

In the last unit we saw what demand is, and what its determinants are. We know that demand is sensitive to changes into these determinants; it is important to know how sensitive. Economists do this by measuring elasticity. In particular, they study price, income and cross price elasticity of demand. This is new language, so some definitions are needed.

Elasticity is simply the economist's word for responsiveness. For example, price elasticity shows how responsive demand is to changes in price. In this section we consider the following topics in detail:

  • Price elasticity of demand (PED)
  • Cross elasticity of demand (XED)
  • Income elasticity of demand (YED)
  • Price elasticity of supply (PES)
  • Applications of concepts of elasticity
  • PED and taxation
  • Other applications of elasticity

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