Elasticity masterclass
PED, income elasticity, cross-price, and revenue logic.
Price elasticity of demand
PED = (%ΔQd) / (%ΔP). |PED| > 1 elastic; < 1 inelastic. Along linear demand, elasticity changes by price segment.
Revenue rule
If demand is inelastic, a price rise raises total revenue (fewer units lost in % terms). If elastic, a price cut can raise revenue. Olympiad favorite: link elasticity to monopoly pricing power.
Income and cross elasticity
Income elasticity: normal vs inferior goods. Cross elasticity: substitutes (positive) vs complements (negative).