1. Elasticities of Demand
___ __Elasticity of __________: The responsiveness of ________ to a change in ______
Elasticities are used by economists to consider the size and direction of impact a particular change
may have.
To calculate all elasticities we must be able to calculate a percentage change
Price Elasticity of Demand (PED)
There are many different elasticities that economists use but the most frequently used is
The sign for PED will (nearly) always be as a increase in price will lead to a fall in demand for
that good. For this reason it is sometimes missed off (you should NOT do this).
The value of the elasticity is significant:
Value Elasticity Significance Implication
0 to ­1
­1
.
­1 to ∞
Examples:
A firm raises its price from £1.50 to £2. Demand falls from 150 to 120 units. Calculate the PED
A firm reduces its price from £12 to £9. Demand rises from 1000 to 1800 units. Calculate the PED
A firm faces a PED of ‐2 and it raises its price from £2 to £4. Calculate the change in demand

2. PED and Gradient
PED is NOT the same as gradient.
Elasticity alters along the length of a demand curve
Price/unit 10
∞ =
5
0 =
5 10
Quantity
Sometimes it may look as though we alter the steepness of the curve to show a low elasticity. What
is actually happening is that we attempting to show that the firm is operating on the elastic or
inelastic part of the demand curve.
Perfectly Elastic Elastic Unitary
P P P
Q Q Q
Inelastic Perfectly Inelastic
P P
Q Q

3. Factors Affecting PED
Goods Estimated Elasticity of Demand (US)
Inelastic
Matches 0.1
Airline travel, short-run 0.1
Gasoline, short-run 0.2
Gasoline, long-run 0.7
Tobacco products, short-run 0.45
Approximately Unitary Elasticity
Private education 1.1
Tires, short-run 0.9
Tires, long-run 1.2
Radio and television receivers 1.2
Elastic
Restaurant meals 2.3
Foreign travel, long-run 4.0
Airline travel, long-run 2.4
Fresh green peas 2.8
Automobiles, short-run 1.2 - 1.5

4.
Income Elasticity of Demand (YED)
The change in income may be national, regional or restricted to a particular section of society.
Sign Type of Significance Example
Good
+ve
­ve
The magnitude is still important and remains the same as for PED.
Remember that what constitutes an inferior good will depend on social factors and level of income.
E.g. if you get your first pay check then you may buy a new ford Fiesta with the money. Ronaldo
would have to take a big cut in pay before he would buy one.
Engels Curves
Engels curves are used to show the relationship between income and demand (in the same way
demand curves show the relationship between price and demand)
Y Y
Q Q
Normal Good Inferior Good
Numerical Examples
1. Calculate YED if an increase in income from £100 to £130 leads to a fall in demand from 25 to 20
units. Is it normal or inferior, elastic or inelastic?
2. A fall in demand from 90 to 70 units is caused by a fall in income from £400 to £390. Is the good
normal or inferior, elastic or inelastic?

5. Cross Price Elasticity of Demand (XED)
Type of Significance Example
Sign Good
+ve
­ve
The magnitude of the sign indicates the strength of relationship between the goods in the same way
as for PED.
NB The relationship does not have to be reciprocal – an increase in the price of a car may lead to a
large fall in demand for certain tyres but an increase in the price of tyres may have no effect on
the demand for the car.
Examples
1. An increase in the price of A from £20 to £25 results in a fall in demand for B from 120 to
110 units. Calculate XED and comment on the relationship between A and B.
2. A decrease in the price of Y from £20 to £18 results in a fall in demand for X from 10 to 9
units. Calculate XED and comment on the relationship between X and Y.
Problems with Elasticities
It is important to note that the usefulness of an elasticity relies entirely on its accuracy.

6.
Elasticity Practice Question
Each day thousands of workers, shoppers and tourists make
the journey between Bristol and Bath. Public transport
between the 2 cities comprises a railway and 2 bus companies
(West Country Buses and Badgerline)
West Country Buses are the smaller of the 2 bus companies. It charges £2 for a single ticket, has 500
customers and earns revenue of £1,000 per day.
Last year it commissioned some market research which estimated that demand for its bus service
has the following characteristics:
PED = ‐2
YED = ‐ 0.5
XED with respect to the price of the rail service is = +0.5
XED with respect to the price of a Badgerline’s service is = +1.5
1. What is meant by the term Price Elasticity of Demand (2 marks)
2. If West Country Buses raised their prices from £2 to £3 how many single
journeys would be demanded? (2 marks)
3. Explain what is meant by the term “elasticity” and discuss the usefulness
of the above figures to the West Country buses. (15 marks)

7. Price Elasticity of Supply (PES)
Price Elasticity of Supply:
Short Run:
Long Run:
How much more producers will supply if the price they are offered rises.
Value Elasticity Significance Intercept
0 to 1
1
1 to ∞
PES is not the same as the gradient.
Perfectly Elastic Elastic Unitary
P P P
Q Q Q
Inelastic Perfectly Inelastic
P P
Q Q

8. Factors Affecting PES
The Effect of Time Period on Supply
The shape and elasticity of the supply curve is affected by the time period under consideration. If the
price change is very short lived the result will be very different from that produced by a longer‐lived
change
The Momentary Time Period
In the momentary period
P
and hence it is not possible
to increase , whatever the price offered. This
leads to a supply curve with an PES of
Q
The Short Run
In the short run
(we usually assume ) and so the
firm will experience (to P
labour).
This means that the firm can produce more in response to
an increase in demand but the rising cost per unit will mean
that the response to price changes is relatively inelastic
Q
The Long Run
In the long run
(although we usually assume the state of
technology to be constant) and so the firm will be able to P
respond better to a change in price. It may benefit from
which will further increase the
elasticity of supply.
It is theoretically possible that the firm could benefit from
such large economies of scale that the supply curve could
even slope down in the very long run. This is, however, Q
unlikely and not part of the AS course

9.
End of Topic Questions on Demand, Supply and Elasticity
Foreign Exchange Markets
1. How is the Exchange rate for the £ determined? Explain using a diagram (8)
Labour Market
2. Using a diagram show why Footballers get paid more than Nurses. (Think Demand and supply and
elasticity) (8)
Government
3. Show and explain why a tax on cigarettes would be less effective than a tax on Luxury holidays in
terms of reducing the number of customers (8)
Short Answers
4. The data in the table below shows the demand and supply for digital cameras at various prices.
Price (£) Quantity demanded (millions per Quantity supplied (millions per year)
year)
16 140 20
32 120 60
48 100 100
64 80 140
80 60 180
a. What would be the excess demand or supply if the price was set at £32? (2)
b. What would be the excess demand or supply if the price was set at £80? (2)
c. What is the equilibrium price and quantity? (2)
d. If income rises and demand, as a result, rises by 20 million units at each level, what will be
the new equilibrium price? (2)

10. 5. The table below gives the levels of demand and supply for a good.
Price (£) Demand ('000 per month) Supply ('000 per month)
11 ‐ 200
10 30 180
9 60 160
8 90 140
7 120 120
6 150 100
5 180 80
4 210 60
3 240 40
2 270 20
1 300 ‐
a. What is the equilibrium price and quantity? (2)
b. If the government supports a minimum price of £10, by how much does supply exceed
demand? (2)
c. If the government controls the price at a maximum of £3, by how much does demand
exceed supply? (2)
d. If the government placed a subsidy of £5 per unit on this good, what would be the new
equilibrium price and quantity? (2)
e. How much would this subsidy cost the government per month? (2)
6. What do each of the following measure? (4)
a. Price elasticity of demand
b. Price elasticity of supply
c. Income elasticity of demand
d. Cross‐price elasticity of demand
7. Give equations for each of the above (4)
8. If PED is < ‐1 then demand is ……… (2)
9. If price is increased for an elastic product total revenue will… (2)
10. Cross price elasticity of demand occurs where…. (2)
11. If the income elasticity of demand for a good is negative then it is said to be….. (2)
12. List the factors that affect Price elasticity of demand. (4)
13. List the factors that determine price elasticity of supply (4)
(Total 66)