Elasticity (Theme 1: Intro to Markets + Market Failure)

What does Price Elasticity of Demand mean?

The responsiveness of demand to a change in price

What is the formula for Price Elasticity of Demand?

PED = % change in quantity / % change in price

What does the Price Elasticity of Demand show?

• PED > 1 → Elastic Demand → Demand is very responsive to a change in price

• PED = 1 → Unitary Elasticity → Demand is proportionally responsive to a change in price

• PED < 1 → Inelastic Demand → Demand is not responsive to a change in price

What are the graphs for different Price Elasticities of Demand?

• Perfectly Elastic Demand - straight horizontal line

• Unitary Elasticity - reciprocal curve

• Perfectly Inelastic Demand - straight vertical line

What is the formula for Revenue?

Revenue = Price per unit x Quantity

What factors influence the Price Elasticity of Demand?

• Is the good a necessity?

• Is the habit forming?

• Number of substitues

• Level of brand loyalty

What does Price Elasticity of Supply mean?

The responsiveness of supply to a change in price

What is the formula for Price Elasticity of Supply?

PES = % change in quantity / % change in price

What are the graphs for different Price Elasticities of Supply?

• Perfectly Elastic Supply- straight horizontal line

• Perfectly Inelastic Demand - straight vertical line

How does Price Elasticity of Supply differ at different time lengths?

• Very short run - Perfectly Inelastic Supply

• Short run - Relatively Inelastic Supply

• Long run - Relatively Elastic Supply

What goods/services usually have a Elastic/Inelastic Price Elasticity of Supply?

• Elastic → Manufactured goods

• Inelastic → Commodities/crops

What factors influence the Price Elasticity of Supply?

• Amount of excess

• Level of stock

• Access to labour

• Access to capital

What does Income Elasticity of Demand mean?

The responsiveness of supply to a change in income

What is the formula for Income Elasticity of Demand?

YED = % change in quantity / % change in income

What does the Income Elasticity of Demand show?

• Positive YED → Normal Good

• YED > 1 → Income Elastic, Luxury

• YED = 1 → Unitary Elasticity

• 0 < YED < 1 → Income Inelastic, Neccessity

• Negative YED → Inferior Good

What does Cross Elasticity of Demand mean?

The responsiveness of demand for one product to a change in price for another product

What is the formula for Cross Elasticity of Demand?

XED = % change in quantity demanded of X / % change in price of Y

What does the Cross Elasticity of Demand show?

• Positive XED → Substitutes

• XED = 0 → Unrelated Products

• Negative XED → Complements/Derived/Joint Demand