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Elasticity
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a measure of responsiveness of quality demanded or quality supplied (the percentage change in the quantity demanded or supplied)
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Formula of Elasticity of Demand
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% change in quantity demanded / % change in price
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standard method of computing the percentage of change
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(end value - start value/start value) x 100
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midpoint method formula
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(end value - start value / midpoint) x 100%
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price elasticity of demand formula
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(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]
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price elasticity is higher when
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a good has more close substitutes available
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narrowly defined goods
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higher elasticity
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broadly defined good
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lower elasticity
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Is price elasticity higher for luxuries or necessities?
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luxuries
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Is price elasticity higher for the short run or the long run?
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long run
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demand is elastic
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price elasticity of demand is > 1
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demand is inelastic
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price elasticity of demand < 1
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Demand has unit elasticity
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price elasticity of demand = 1
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Demand is perfectly inelastic when
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Price elasticity of demand = 0
Demand curve is vertical
Demand curve is vertical
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Demand is perfectly elastic
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Price elasticity of demand = infinity
Demand curve is horizontal
Demand curve is horizontal
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the flatter the demand curve
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the greater the price elasticity of demand
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total expenditure equation
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Price x Quantity
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total expenditure equals
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total revenue
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normal good
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income elasticity > 0 (as income increases quantity increases)
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inferior good
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income elasticity < (as income increases quantity decreases)
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income elasticity of demand
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a measure of how much the quantity demanded of a good responds to a change in consumers' income
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cross-price elasticity of demand
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a measure of how much the quantity demanded of one good responds to a change in the price of another good
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substitutes (cross price elasticity)
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positive
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complements (cross price elasticity)
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negative
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as quantity increases
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there is less elasticity of supply
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