Unit 3: Elasticity
Lesson 1
Price Elasticity of Demand
Total Revenue Test
Measures buyers' responsiveness to price changes.
Elastic Demand
Inelastic Demand
Senstitive to price changes
Large change in quantity demanded
Insensitive to price changes
Small change in quantity demanded
Ed = % change in quantity demanded for X /% change in price for X
Ed = Change in quantity/(Sum of quantities/2) / Change in price/(Sum of prices/2)
Midpoint formula
If:
Ed>1
Elastic demand
Ed=1
Unit Elastic demand
Ed<1
Inelastic Demand
Ed=0
Perfectly Inelastic demand
Ed=Infinity
Perfectly Elastic demand
Total Revenue = Price x Quantity
If Inelastic Demand
Price and Total Revenue move in same direction
If Elastic Demand
Price and Total Revenue move in opposite directions
Lesson 2
Determinants of Price Elasticity of Demand
Substitutability
Proportion of Income
Luxuries vs. Necessities
More substitutes = more elastic demand
Less substitutes = less elastic demand
Luxury goods = more elastic demand
Necessity Goods = less elastic demand
Higher = more elastic demand
Time
More available = more elastic demand
Lower = less elastic demand
Less available = less elastic demand
Price Elasticity of Supply
Measures sellers' responsiveness to price changes
Elastic Supply
Inelastic Supply
Products are responsive to price changes
Products are not responsive to price changes
Es = % change in quantity supplied for X /% change in price for X
If:
Es=1
Unit Elastic supply
Es>1
Elastic supply
Es=0
Perfectly Inelastic Supply
Es<1
Inelastic Supply
Time
Primary determinant of Supply Elasticity
Immediate Market period
Short Run
Long Run
Lesson 3
Cross Elasticity of Demand
Income Elasticity of Demand
Exy = % change in quantity demanded for X /% change in price for Y
Measures responsiveness of purchases of one good to change in the price of another good
If:
Elasticity is positive
Substitute goods
Elasticity is zero
Independent goods
Elasticity is negative
Complement goods
measures responsiveness of buyers to change in income
Ei = % change in quantity demanded /% change in income
If:
Elasticity is positive
Elasticity is negative
Normal goods
Inferior goods