Explain income elasticity, cross elasticity and elasticity of supply, and their uses in business decisions.

1. 1 · Introduce elasticity. Elasticity measures the responsiveness of quantity to a change in a determinant.
2. 2 · Income elasticity. Formula; luxury, necessity and inferior goods; example: income +25%, meals +50%, YED = 2.
3. 3 · Cross elasticity. Formula; positive for substitutes, negative for complements; tea-coffee +0.3, petrol-motorcycles −0.4.
4. 4 · Elasticity of supply. Formula; example: price +20%, supply +30%, PES = 1.5.
5. 5 · Determinants of supply elasticity.
   • Time period
   • Spare capacity and stocks
   • Production lag (tea, coconut)
   • Factor mobility
6. 6 · Business uses. Sales forecasting over the business cycle, identifying rivals, bundling complements, planning capacity.
7. 7 · Sri Lankan business link. Tourism has high income elasticity; tea and coconut supply is inelastic in the short run.
8. 8 · Conclude. Each elasticity answers a different business question, so managers use all three together.

Scoring tip: Write the sign with every cross elasticity answer. The sign is the whole point.