2.4 Measuring the responsiveness of demand.
Price Elasticity: Is a measure of the responsiveness of demand to a change in price.
The elasticity of a product is determined by a number of factors:
- Number of substitutes.
- Time.
- Definition of the market.
Formulae for elasticity: 1. ? = Percentage change in quantity demanded / Percentage change in price. 2. (Change in quantity demanded/change in price) X (Price/Quantity demanded)
? < 1 Inelastic. Change in price will lead to a smaller change in demand.
? = 1 Unit elasticity. Demand is equally responsive to a change in price.
? > 1 Elastic. Demand is responsive to a change in price.
? = ? Perfectly elastic demand. Demand is very responsive to a change in price.
2.5 Income elasticity: Measures the responsiveness of demand to a change in income. Y? = Percentage change in demand / Percentage change in income.
Cross-Price elasticity: Measures the responsiveness of demand to a change in the price of a substitute or complement. XY? = Percentage change in demand of product X / Percentage change in the price of product Y.