PED, XED, YED, PES

Chapter 3: Elasticities

Key Terms:

 PED: Price elasticity of demand

 PES: Price elasticity of supply
 XED: Cross-price elasticity of demand
 YED: Income elasticity of demand
 Calculate: Means to solve for
 Interrupt: Means to explain the value of elasticity (<1, >1, or =1)
 Explain: Means to explain why you think the value is <1, >1, or =1

1. Assume a fall in the price of Pepsi from $2/liter to $1.75/liter causes the quantity of Coca Cola sold to fall from
6,000 liters to 4,500 liters. Calculate, interpret, and explain the XED for Coke and Pepsi.

4,500 − 6,000
6,000
𝑋𝐸𝐷 = = +2
1.75 − 2
2

2. Due to rising unemployment, bike sales are rising across the USA. The bike industry estimates that, ceteris
paribus, a 1% fall in average income leads to a 1.5% increase in the sales of bikes. Calculate, interpret, and explain
the YED for bikes.

+1.5%
𝑌𝐸𝐷 = = −1.5
−1%

3. The PED coefficient is always negative. Why?

The first law of demand states that as price increases, less quantity is demanded. This is
why the demand curve slopes down to the right. Because price and quantity move in
opposite directions on the demand curve, the price elasticity of demand is always
negative.
4. When RyanAir began flying between London and Paris the price of air travel between the two cities fell from an
average of 100 euros each way to just 60 euros each way. As a result, the EuroStar high speed rail line saw its
annual tickets sales from 800,000 to 720,000 tickets. Calculate, interpret, and explain the XED for air travel and
train travel between London and Paris.

720,000 − 800,000
800,000
𝑋𝐸𝐷 = = +0.25
60 − 100
100

5. As the Chinese economy grows, car sales are rising exponentially. In the last decade, the number of cars on
Chinese roads has increased ten-fold, as the per capita income in China has risen from $1,000 to 4,000. Calculate,
interpret, and explain the YED for cars in China.

9
𝑌𝐸𝐷 = = +9
4,000 − 1,000
1,000

6. Due to the strong value of the Swiss franc, Swiss ski areas have had to reduce the prices they charge for lift tickets
and try and attract foreign tourists to their resorts. Last season, the average price of a day of skiing fell from 50
CHF to 45 CHF. At the same time, sales of ski equipment in Switzerland increased 7%. Calculate, interpret, and
explain the XED for ski lift tickets and skis in Switzerland.

7
𝑋𝐸𝐷 = = − 70
45 − 50
50
7. Migros, a large Swiss grocery store, saw the sale of its “M-Budget” brand toilet paper increase by 22% in 2009,
while the per capita income in Switzerland fell due to recession by 2%. Calculate, interpret, and explain the YED
for M-Budget toilet paper in Switzerland.

+22%
𝑌𝐸𝐷 = = −11
−2%

8. Starbucks estimates that if it changes the price of its popular drink, the caramel macchiato winichinni, at all, then
its revenues from the sales of the caramel macchiato winichinni will fall. What is the PED for caramel macchiato
winichinnis?

Price elastic demand: PED > 1

9. 3D cinema has led to an increase in the demand for movie tickets in Casablanca. As a result, the price of a movie
ticket has risen from 17 MAD to 22 MAD, and movie theaters, by offering showings earlier in the day and later in
the evening, have increased the number of movies available by 15%. Calculate the PES of movies in Casablanca. If
demand continues to grow, what will happen to theaters’ ability to respond to higher prices over time. How will
this affect the PES over time?

15
𝑃𝐸𝑆 = = 51
22 − 17
17