Econ HL Elasticities

Topic 3 Elasticities

Define Elasticities

Define Elasticities

Msasures the responsiveness of a variable to changes in price or any of the variable determinants.

PED

Price Elasticity of Demand

YED

Income Elasticity of Demand

PES

Price Elasticity of Supply

Define PED

measures the responsiveness of consumers of a good or service to a change in price of a good or service.

PED Calculation

Qnew-Qold/Qold / Pnew - Pold/Pold

0 < PED/S < 1

Inelastic demand; Qd is relatively unresponsive to the change in price.

1 < PED/S < ∞

Elastic demand; Qd is relatively responsive to the change in price.

PED/S = 1

Unit Elastic demand; Qd is proportionally responsive to change in price.

PED/S = 0

Perfectly Inelastic demand; Qd is not responsive to change in price

PED/S = ∞

Perfectly elastic demand; Qd is infinitely responsive to change in price

Determinants of PED (splat)

1. substitutes,

2. proportion of income

3. luxury or necessity

4. addictiveness

5. time

PED importance for firms

can predict effect of changes in price on Qd or TR

PED importance for gov

can predict effects of applying indirect taxes on goods

primary commodities

demand is inelastic because very little substitutes

manufactured goods

demand is elastic, because many substitutes

define YED

Measures the responsiveness of demand to changed in income, and involves demand curve shifts.

YED Calculation

Qnew-Qold/Qold / Ynew - Yold/Yold

YED is greater than 0

normal good (positive)

YED is less than 0

Inferior good (negative)

YED is greater than 1

luxury good (income elastic)

YED is less than 1

necessity (income inelastic)

Engel Curve

Shows relationship between income and Qd of a good

YED for firms

When income rises, demand for normal goods also rises.

1. If demand for normal goods is elastic, demand will rise faster than incomes

2. If demand for normal goods is inelastic, demand will rise slower than incomes.

Why is Primary Sector income inelastic?

they are necessities and have no substitutes

Why are Secondary/Tertiary goods elastic?

available substitues

Define PES

Measures the responsiveness of the quantity of a good supplied to changes in its price.

PES Calculation (+)

Qnew-Qold/Qold / Pnew - Pold/Pold

Determinants of PES (maurt)

1. mobility of resources

2. ability to store stock

3. unused capacity

4. rate of cost of production

5. time

How do you know that a good is elastic?

there are alternatives, usually cheaper: (If a price change for a product causes a substantial change in either its supply or its demand)

How do you know that a good is inelastic?

you are going to buy this good no mater what: (When the price of a good or service changes and the quantity demanded of that good does not significantly change)

Demand elasticity/inelasticity rubric

1. price levels,

2. type of product or service,

3. income levels,

4. availability of substitutes