formulae for and calculation of price elasticity, income elasticity and cross elasticity of demand

📈 Price Elasticity of Demand (PED)

Price elasticity measures how much the quantity demanded of a good changes when its price changes. Think of it like a seesaw: if the price goes up, the demand might drop (seesaw tilts), and if the price goes down, demand might rise.

1. Find the initial price P₁ and quantity Q₁.
2. Find the new price P₂ and quantity Q₂.
3. Plug into the formula below.

If |E_d| > 1, demand is elastic (big reaction). If |E_d| < 1, demand is inelastic (small reaction). If |E_d| = 1, it’s unit‑elastic.

💰 Income Elasticity of Demand (YED)

Income elasticity tells us how demand changes when people’s income changes. Imagine you get a new allowance – do you buy more snacks or stick to the same?

1. Record the initial income I₁ and quantity Q₁.
2. Record the new income I₂ and quantity Q₂.
3. Use the formula below.

If E_y > 0, the good is a normal good (demand rises with income). If E_y < 0, it’s a inferior good (demand falls as income rises).

🛍️ Cross Elasticity of Demand (XED)

Cross elasticity measures how the demand for one product changes when the price of another product changes. Think of two friends: if one’s price goes up, the other might become more popular.

1. Take the price of product A P_A and quantity of product B Q_B.
2. After a price change, record new price P_A' and new quantity of B Q_B'.
3. Insert into the formula below.

If E_{xy} > 0, the goods are substitutes (price rise of A boosts demand for B). If E_{xy} < 0, they are complements (price rise of A reduces demand for B).