elasticity

elasticity

the responsiveness of a change in price to a change in quantity

PED

how does quantity demand respond to a change in price

PES

how does quantity supply resond to a change in price

YED

how does demand respond to a change in consumer income

CPED

how does quantity demand of one good respond to a change in price to a different good

elastic demand (luxury)

• PED >1

• % change in QD > % change in price

• many substitutes

• consumer has choice

inelastic demand (necessity)

• PED > 1

• % change in price > % change in Qd

• Qd unresponsive to P changes

• poor/no substitutes

• little or no choice

unitary PED 

• PED = 1 

• % change in P = % change in Qd

• mdpt. straight-line D curve 

perfectly elastic

• PED = infinity

• % change in price is infinite to % change in Qd

perfectly inelastic

• PED = 0

• % change in price has no effect on Qd

PED determinants

• substitutes

• luxury or necessity good

• proportion of consumer income

• time frame

what happens to TR if demand is elastic 

• TR moves in the same direction as Q 

• incentive for suppliers to lower prices 

what happens to TR if demand is inelastic

• TR moves in the same direction as P

• incentive for suppliers to raise prices

what happens to TR if demand is unitary

TR remains unchanged

what happens to TR if demand is perfectly elastic

• P increases as Q falls to zero

• TR will also fall to zero

what happens to TR if demand is perfectly inelastic 

• TR changes with P in the same direction as P 

• incentive to raise for suppliers to raise prices 

substitutes

positive

complementary

negative

CPED > 1

• strong substitutes

• CPED is elastic

0 < CPED < 1

• weak substitutes 

• CPED is inelastic 

-1 < CPED < 0

• weak complements

• CPED is inelastic

CPED < -1

• strong complements

• CPED is elastic

CPED = 0

no relationship

YED > 1

• luxury and elastic 

• high quality goods with inferior relatively cheaper substitutes 

YED < 1

necessity and inelastic

YED < 0

• inferior good

• goods with superior more expensive substitutes

how can YED differ

it depends of the level of Y and the demand for the good, e.g. consumer with high income or low income

determinants of PES 

• shift resources between alternative uses 

• immediate market period 

• short run 

• long run

how can PED be applied

in large crop yields and taxes

steeper demand or supply curve

more inelastic demand is

what does PED/S have a large impact on

who bears the burden of tax, e.g. consumers or producers

what happens if consumers bear the burden of tax

demand curve shifts to the left

what happens if producers bear the burden of tax

supply curve shifts to the left

if demand is elastic and supply is inelastic, who bears the burden of tax

producers (will pay more)

if demand is inelastic and supply is elastic, who bears the burden of tax 

consumers (will pay more)

if both demand and supply is elastic, who bears the burden of tax

both (pay equally)

if both demand and supply is inelastic, who bears the burden of tax

both (pay equally)