Part II.

Basics of Demand and Supply

Elasticity - measures the percentage change of one economic variable in response to

a percentage change in another. It is a general measure of the responsiveness of an
economic variable in response to a change in another economic variable.

Price elasticity of demand – demonstrates how a change in price affects the quantity
demanded. It is usually computed as the percentage change in quantity demanded
over the percentage change in price, and it will commonly result in a negative
elasticity because of the law of demand.

Four Factors that Affect Price Elasticity of Demand

1. Availability of substitutes
2. If the good is a luxury or necessity
3. The proportion of income spent on the good
4. How much time has elapsed since the time the price changed
Cross–price elasticity of demand – measures how the demand for one good is
impacted by a change in the price of another good. If the cross-price elasticity of
demand between two goods is positive, it implies that the two goods are substitutes.

Income elasticity of demand – is the measure of the percentage change of the

quantity demanded of a good in references to changes in consumer’s income.

Calculating the income elasticity of demand allows economists to identify normal

and inferior goods, as well as how responsive quantity demanded is to changes in
income.