Elasticities
Elasticities in economics refers to the responsiveness of an economic variable (such as demand for a product) to a change in another variable (such as the price of that product). The most common form of elasticities are those that attempt to measure the responsive of the quantity demanded (QD) to a change in price (price elasticity of demand) as well as the responsiveness of the quantity supplied to a change in the price (price elasticity of supply).
However, there are other types of elasticities that are more likely to be considered as part of a first year university course. This includes:
Income elasticity of demand (YED): the responsiveness of the QD for a product to a change in income. For example, if income levels of consumers in the economy increases by 50% and the QD for a particular product increases by 100%, then the YED is 2 and the product in question is considered to be a Normal Good (or even a luxury good). However, if the QD increased by less than 50% then the product is likely to be considered a Necessity (such as bread or milk). On rare occasions, it is possible for the YED to be negative, which means an increase in the income of consumers will result in a reduction in the demand for a particular product. These products are considered to be Inferior Goods and include cheap cars and interstate bus travel.
Cross price elasticity of demand (XED): the responsiveness of the QD for a product to a change in the price of another product. Measurement of this elasticity helps to determine if products are complements or substitutes. For example, if the price of coffee increases by 100% we might observe that the demand for sugar decreases by 10%, resulting in a negative value for the XED. A negative value for the XED therefore indicates that coffee and sugar are complements. However, if the price of coffee increases by 100% we might observe that the demand for tea increases by 50%, resulting in a positive value for the XED. A positive value for the XED therefore indicates that coffee and tea are substitutes.
