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Elasticity of demand
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a measure of how consumers react to a change in price
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Elastic demand
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when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
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Inelastic demand
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when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
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Factors that affect the price elasticity of demand
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1. availability of substitutes
2. necessities vs luxuries.
3. definition of the market.
4. time horizon
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Elasticity of supply
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a measure of the way quantity supplied reacts to a change in price
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Price elasticity equation
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% change in quantity / % change in price
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elastic w/ price increase
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revenue decreases
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elastic w/ price decrease
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revenue increases
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inelastic w/ price increase
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revenue increases
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inelastic w/ price decrease
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revenue decreases
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perfectly elastic demand curve
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horizontal
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perfectly inelastic demand curve
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vertical
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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, computed as the percentage change in quantity demanded divided by the percentage change in income
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cross-price elasticity of demand
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refers to the responsiveness of the quantity demanded of good X to changes in the price of good Y
= % change in X / % change in Y
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elasticity of income > 1
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then normal good
if < 1, then inferior
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elasticity of cross-price > 1
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then substitute
if < 1, then complement
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