Price elasticity of demand and income elasticity are two important ideas in practical business activities. Price elasticity, which is represented by PED, measures the changes of one product’s demand in response to a changing in its price. We can write an equation in this way: Price elasticity of demand = percentage change in quantity demanded of the product / percentage changes in price of the product. This is abbreviated to: XED=%ΔQD / %ΔP. Income elasticity of demand (represented by YED) shows the relationship between a change in quantity demand and the changing in income. The equation can be written as: Income elasticity of demand = percentage change in quantity demanded / percentage changes in income. Abbreviated to: YED=%ΔQD / %ΔY.
These are just two terms, but how they work is the most important part. For companies, price elasticity of demand is actually effects of prices’ changing on its own sales of products; and income elasticity of demand is effects of consumers’ changes on its sales. Generally speaking, learning the two relationships can help the business find out the situation of the market and make right decisions.
Price Elasticity of Demand (PED)
The value of price elasticity of demand is usually negative. The product with high value of PED is described to be elastic, while for one with low PED is said to be inelastic. Just an example to show this idea: when Mc Donald rises its price of burger from $2 to $2.3, and its demand falls from 20 million to 14 million, so its PED= (14 million-20 million)/20 million / (($2.3-$2)/$2 = 30% / 15% = 2. It’s a quite big value of PED, so this is elastic. In order to show the degree of elasticity, we use graphs. There are generally 5 types of graphs, and through them we can see the product’s PED, and company can make decisions in different situations.
Type 1: Elastic demand
(Please ignore the numbers on it.) This...