Elasticity

Price Elasticity of Demand

  • measure of how much the quantity demanded of a good responds to a change in the price of that good

The Price Elasticity of Demand and Its Determinants
(Demand tends to be more elastic)

Availability of Close Substitutes

  • The larger the number of close substitutes

Necessities versus Luxuries

  • The good is a luxury

Definition of the Market

  • The more narrowly defined the market

Time Horizon

  • The longer the time period

The Variety of Demand Curves

Perfectly Inelastic

  • Quantity demanded does not respond to price changes

Perfectly Elastic

  • Quantity demanded changes infinitely with any change in price

Unit Elastic

  • Quantity demanded changes by the same percentage as the price

Total Revenue

  • the amount paid by buyers and received by sellers of a good
    TR = P X Q
  • With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller
  • Total revenue increases
  • With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger
  • Total revenue decreases

Price Elasticity of Supply

  • measure of how much the quantity supplied of a good responds to a change in the price of that good

Calculation the price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Midpoint to calculation the price elasticity of demand

Calculation of income elasticity of demand = Percentage change in quantity demanded / Percentage change in income

Calculation the cross- price elasticity of demand = % change in quantity demanded of good 1 / % change in price of good 2

Income Elasticity

Types of Goods

  • Normal Goods ( When higher income, the quantity demanded for normal goods will be raises)
  • Inferior Goods (When higher income, the quantity demanded for inferior goods will be lowers)

Necessities tend to be income inelastic
Luxuries tend to be income elastic

The Price Elasticity of Supply and Its Determinants

Ability of sellers to change the amount of the good they produce

Time Period

Calculation the price elasticity of supply = Percentage change in quantity supplied / Percentage change in price

The Variety of Supply Curves

Perfectly Inelastic

  • Quantity supplies does not respond to price changes

Perfectly Elastic

  • Quantity supplies changes infinitely with any change in price

Unit Elastic

  • Quantity supplies changes by the same percentage as the price