ELASTICITY
CROSS ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND
Price Elasticity of Demand = % change in quantity demanded of product x divided by % change in price of product x
Inelastic Demand - insensitive to price changes
Midpoint formula provides more consistent results and is calculated by change in quantity over sum in quantities/2 divided by change in price over sum or prices/2
Elastic Demand - sensitive to price changes
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Measures buyers responsiveness to price changes
Total Revenue = Price x Quantity
Elastic Demand - price and total revenue move in opposite directions
Inelastic Demand - price and total revenue move in the same direction
Determinants of Price Elasticity of Demand
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Ed = 1 ... demand is unit elastic
Ed < 1 ... demand is inelastic
Ed > 1 ... demand is elastic
Ed = 0 ... demand is perfectly inelastic
Ed = infinity ... demand is perfectly elastic
Substitutability
Proportion of Income
Time
Luxuries vs Necessities
PRICE ELASTICITY OF SUPPLY
Measures sellers responsiveness to price changes
Inelastic Supply - producers are less responsive to price changes
Elastic Supply - producers are responsive to price changes
Price Elasticity of Supply = % change in quantity supplier of product x / % change in price of product x
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Es > 1 ... supply is elastic
Es = 1 ... supply is unit elastic
Es < 1 ... supply is inelastic
Es = 0 ... supply is perfectly inelastic
Price Elasticity of Supply and Time
Short run
Long run
Immediate market run
Change in price of one good and demand for its complment move in opposite dcirections - elasticity is negative
Independant goods have zero elasticity
Change in price of one good and change in demand of substitute good move in the same direction - elasticity is positive
INCOME ELASTICITY OF DEMAND
Exy = % change in quantity demand of product x / % change in price of product y
Measures responsiveness of purchases of one good to the change in price of another good
Demand for normal goods increases when elasticity is positive
Demand for inferior goods increases if elasticity is negative
Measures responsiveness of buyers to changes in their income
High income elasticities are most affected by a recession and low income elasticities are least affected by a recession
Ei = % change in quantity demanded / % change in income