Elasticities of Demand and Supply Summary Sheet Type of Elasticity | Price Elasticity of Demand (PED) | Income Elasticity of Demand (YED) | Definition | The degree of responsiveness of quantity demanded to a change in price of the good itself, ceteris paribus. | The degree of responsiveness of demand to change in income, ceteris paribus. | Formula | PED = %∆ Qdd / %∆ Price | YED = %∆ Qdd / %∆ Income | Initial change | Price | Income | Effect | Quantity Demanded | Demand | Sign(Significance of the sign) | Negative (Inverse Relationship) | Negative(Inferior Goods) | Positive(Normal Goods) | Range of values | PED>1 | PED<1 | YED<0 | 0 < YED < 1(Basic Necessities) | YED > 1(Luxury Goods) | Elastic/inelastic | Price Elastic | Price Inelastic | - | Income Inelastic | Income Elastic | Factors | * Availability and Closeness of Substitutes * Nature of demand (Luxury, addictive, necessity) * Time Period under consideration * Percentage of income spent on good | * Quality of good * Nature of good e.g. luxury, inferior | Application(Consider application to producers and the government) | * Producers: To increase total revenue * ** Split consumer groups, each have different PED. * Producers should increase price of good if good is price inelastic (no close substitutes). * Producers should decrease price of good or refine its quality if good is price elastic. (many close substitutes). * E.g. The increase in revenue due to the increase in quantity demanded is more than proportionate to the decrease in revenue due to a decrease in price. (price elastic) * Price wars do not benefit any party. * Producers must innovate continuously as other firms will follow suit so as to remain competitive. * Government: * ** Split good into different sub-markets, different PED.Tax: When good is price inelastic, taxes are less