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Elasticity
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A measure of the responsiveness of quantity demand or quantity supplied to one of its determinants.
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Price Elasticity of Demand (Ped or PEoD)
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A measure of how much the quantity demanded of a good responds to a change in the price of that good.
(Note: Always take the absolute value of the given equation.)
(Note: Always take the absolute value of the given equation.)
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Price Elasticity of Demand formula
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(% Change in Quantity Demanded)/(% Change in Price)
Note: Always take the absolute value of the given equation.
Note: Always take the absolute value of the given equation.
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Midepoint Method formula
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???
Note: Always take the absolute value of the given equation.
Note: Always take the absolute value of the given equation.
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Three classifications of Elasticity
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1. If Ped>1, demand is said to be Elastic.
2. If Ped≤1, demand is said to be Inelastic.
3. If Ped=1, demand is Unit Elastic.
2. If Ped≤1, demand is said to be Inelastic.
3. If Ped=1, demand is Unit Elastic.
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Total Revenue formula
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TR=P•Q
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Total Revenue and Elasticity: Elastic
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P(rises) TR(falls)
P(falls) TR(rises)
- lower price to increase revenue.
P(falls) TR(rises)
- lower price to increase revenue.
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Total Revenue and Elasticity: Inelastic
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P(rises) TR(rises)
P(falls) TR(falls)
- increase price to increase revenue.
P(falls) TR(falls)
- increase price to increase revenue.
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Determinants of Elasticity: Elastic (5 things)
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1. Many close substitutes.
2. Luxuries.
3. Narrow market (ex: ice cream).
4. Long time horizon (ex: gas in future).
5. Large portion of budget.
2. Luxuries.
3. Narrow market (ex: ice cream).
4. Long time horizon (ex: gas in future).
5. Large portion of budget.
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Determinants of Elasticity: Inelastic (5 things)
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1. Few or no substitutes.
2. Necessities.
3. Broad (ex: food).
4. Short time horizon (ex: gas now).
5. Small portion of budget.
2. Necessities.
3. Broad (ex: food).
4. Short time horizon (ex: gas now).
5. Small portion of budget.
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Income Elasticity of Demand
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A measure of the responsiveness of quality demand to a change in consumer income.
(Note: Do not take absolute values)
(Note: Do not take absolute values)
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Income Elasticity of Demand formula
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IEoD = (% Change in Quantity Demanded)/(% Change in Income)
Note: Do not take absolute values
Note: Do not take absolute values
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Normal Goods (elasticities)
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Have a positive income elasticities.
- necessities have SMALL income elasticities.
- luxuries have LARGER income elasticities
- necessities have SMALL income elasticities.
- luxuries have LARGER income elasticities
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Inferior Goods (elasticities)
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Have negative income elasticities.
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Cross Price Elasticity of Demand
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The responsiveness of the quality demanded of one good to a change in price of another good.
(Note: Do not take absolute values, and use midpoint method.)
(Note: Do not take absolute values, and use midpoint method.)
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Cross Price Elasticity of Demand formula
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???
Note: Do not take absolute values.
Note: Do not take absolute values.
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Substitutes (elasticities)
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Have positive cross price elasticities.
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Complements (elasticities)
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Have negative cross price elasticities.
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