Cambridge International as and a level Economics Ebook

elasticity
. Th
is term can be applied to 
the supply side as well as the demand side of the market. 
It is defi ned as ‘a numerical measure of responsiveness of 
one variable following a change in another variable, 
ceteris 
paribus
’.
Th
e extent of any change is important, particularly 
from a business standpoint. Where a small change in price, 
for example, produces a bigger change in the quantity 
demanded, then the relationship is said to be 
elastic
. 
Alternatively, if a large change in the price produces 
only a small change in the quantity demanded, then the 
relationship is 
inelastic
. Th
e distinction is very important 
as it can be used to explain how businesses respond to a 
range of changing circumstances in their markets.
Elasticity: 
a numerical measure of responsiveness of 
one variable following a change in another variable, 
ceteris 
paribus
.
Elastic: 
where the relative change in demand or supply is 
greater than the change in price.
Inelastic: 
where the relative change in demand or supply is 
less than the change in price.
KEY TERMS
Price elasticity of demand
Price elasticity of demand (PED) 
is a numerical measure 
of the responsiveness of the quantity demanded for a 
product following a change in the price of that product. If 
demand is elastic, then a small change in price will result 
in a relatively larger change in quantity demanded. On 
the other hand, if there is a large change in price and a far 
lesser change in quantity demanded, then demand is price 
inelastic. A numerical example helps to clarify this. A way 
of expressing PED in a numerical form is:
PED
% change in quantity demanded of a product
% change in price of th
=
aat product
Using two specific examples of price changes for two 
general products called product A and product B 
(see 
Figure 2.3
) assume that both of these unrelated 
products are currently priced at $100 and demand for 
them is 1,000 units per month. Consider what might 
happen to the demand for A and B if the price rises to 
$105. The quantity demanded of product A only falls