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What is Elasticity?
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Responsiveness of one variable to changes in another. Used to quantify relationships.
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Price Elasticity of Demand
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Responsiveness of quantity demanded to changes in price.
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Elastic Demand
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price elasticity of demand is greater than one.
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Inelastic Demand
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price elasticity of demand is less than one.
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Unit Elastic demand
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price elasticity of demand is equal to one.
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Perfectly inelastic demand
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price elasticity of demand is equal to zero.
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Perfectly elastic demand
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price elasticity is infinity.
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Elasticity along a linear demand curve
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Price elasticity of demand varies along a linear demand curve:
Demand is unit elastic at the midpoint.
Demand is elastic above the midpoint.
Demand is inelastic below the midpoint
Demand is unit elastic at the midpoint.
Demand is elastic above the midpoint.
Demand is inelastic below the midpoint
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Elastic demand
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an increase in price leads to a decrease in total revenue and vice-versa.
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Inelastic demand
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an increase in price leads to an increase in total revenue and vice-versa.
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Unit elastic demand
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an increase in price will not cause any change in total revenue.
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Availability of substitutes (determinants of price elasticity demand)
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availability of substitutes increases elasticity and vice versa.
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Share of total budget (determinants of price elasticity demand)
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demand will be more elastic the greater the share of total budget item commands and vice versa.
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Time (determinants of price elasticity demand)
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as time increases, demand becomes more elastic.
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Necessity or luxury (determinants of price elasticity demand)
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demand tends to be more inelastic for necessities and more elastic for luxuries.
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Income elasticity of demand (Other measures of elasticity)
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responsiveness of quantity demanded to changes in income.
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Normal Goods (Other measures of elasticity)
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demand increases as income increases and income elasticity is positive.
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Inferior Goods (Other measures of elasticity)
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demand decreases as income increases and income elasticity is negative.
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Cross-price elasticity (Other measures of elasticity)
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responsiveness of quantity demanded of one good to changes in price of another good.
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Substitutes (Other measures of elasticity)
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cross-price elasticity is positive.
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Complements (Other measures of elasticity)
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cross-price elasticity is negative.
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For unrelated goods (Other measures of elasticity)
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cross price elasticity is zero.
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Elasticity of supply (Other measures of elasticity)
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responsiveness of quantity supplies to changes in price.
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