Elasticity
- Price Elasticity of Demand (Ed)
is a measure of how much Qd of a good changes when price of good changes.
Formula: 
% change in Qd / % change in Price
% change in Qd =
[(New Qd - original Qd) / (New Qd + original Qd)/2] x 100
% change in Price =
[(New price - original price) / (New price + original price)/2] x 100
Levels of Elasticity
Elastic
When Ed > 1
Unit Elastic
When Ed = 1
Inelastic
When Ed < 1
Demand Curve
Elastic at any price above midpoint (B)
Unit elastic at midpoint (B)
Inelastic at any price below (B)
2 influences:
Availability of substitutes
Propotion of income spent
Hard to find
The longer the time elapsed since price change
Readily available
How good is defined
Elastic
Inelastic
= more elastic demand
Narrow
Broad
Elastic demand
Inelastic demand
The greater the %, the more elastic
Relationship to Total Revenue (RV)
TR = Price x Quantity
If elastic
a given % rise in Price
Price & TR change in opposite direction
creates a larger % decline in Qd
total revenue decreases
If inelastic
a given % rise in Price
Price & TR change in same direction
total revenue increases
creates a smaller % decline in Qd
If unit elastic
when Price change doesn't change TR
- Price Elasticity of Supply (Es)
is a measure oh how much Qs of a good changes when the price of good changes
Formula
% change in Qs
% change in Price
% change in Qs / % change in Price
[(New Qs - original Qs) / (New Qs + original Qs) / 2 x 100
[(New Price - original Price) / (New Price + original Price) / 2 x 100
Level of Elasticity
Unit Elastic
Inelastic
Elastic
% change in Qs > % change in Price
Es > 1
% change in Qs = % change in Price
Es = 1
% change in Qs < % change in Price
Es < 1
Perfectly Elastic
Perfectly Inelastic
2 Influences
Production possibilities
Storage possibilities
Elastic
Inelastic
goods produced with constant opportunity cost
goods produced in fixed quantity
Elastic
Inelastic
storable goods
non-storable goods
cost of storage in the MAIN influence on supply of strorable good
- Income Elasticity
is a measure of how much demand for a good changes when income changes, other things remaining the same.
Formula
% change in Qd / % change in income
- Cross Elasticity of Demand (CEd)
is a measure how much the demand for a good changes when the price of a substitute or complement changes
Formula
% change in Qd / % change in Price of substitute/complement
CEd for Substitute
if positive
a fall in Price of substitute causes a decreases in Qd
Qd of good & price of substitute change in same direction
CEd for Complement
If negative
a fall in the price of a complement causes an increase in Qd of the good
Qd of good & price of substitute change in opposite directions