Microeconomics and Elasticity

Elasticity

measures the strength of the buyers response to a change in a variable

The price elasticity of demand

percent change in Quanity demanded of good x/ percent change in price of good x

Price elasticity of demand, greater than 1

elastic

price elasticity of demand, less than 1

inelastic

price elasticity of demand, equal to 1

unit elastic

Income elasticity of demand

percent change in quanity demanded of good x/

percent change in income of good x

Income elasticity greater than 0 (positive value)

normal good

income elasticity less than 0 (negative value)

inferior good

Cross-price elasticity of demand

percent change in quanity demanded of good x/

percent change in price of good w

cross-price elasticity greater than 0 (positive value)

x and w are substitute goods

cross-price elasticity = to 0

x and w are unrelated goods

cross-price elasticity less than 0 (negative value)

x and w are complementary goods

The price elasticity of supply

percent change in quanity supply of good x/

percent change in price of good x

elasticity of supply greater than 1

elastic supply

elasticity of supply equal to 1

unit elastic

elasticity of supply less than 1

inelastic

Determinants of price elasticity of demand

1. substitute goods

2. income

3. necessity, luxuray, or durability of good

4. Time

Substitute goods

more substitute goods the more elasticity

Income

goods that command a larger portion of a consumers income are more elastic

Necessity goods

inelastic

Luxuary goods

elastic

durable goods

last a long time, results in post poning purchase-> elastic

Time

more time equals more elasticity

Total Revenue

the income a firm receives from selling its goods or services,

Total Revenue equation

price * quanity demanded

Price and total revenue move in opp. directions

elastic

price and total revenue move in same directions

inelastic

total revenue is unaffected by change in price

unit elastic