Understanding Elasticity in Economics

Elasticity

Measures responsiveness of one variable to another.

Price Elasticity of Demand

Sensitivity of quantity demanded to price changes.

Price Elasticity of Supply

Sensitivity of quantity supplied to price changes.

Polar Cases of Elasticity

Extreme scenarios of elasticity: perfectly elastic/inelastic.

Constant Elasticity

Elasticity remains the same regardless of price changes.

Tiered Pricing

Different price levels for varying service access.

Netflix Price Hike

60% increase in subscription costs in 2011.

Cigarette Tax

Tax on cigarettes to reduce consumption and raise revenue.

Sin Tax

Tax on goods harmful to health, like cigarettes.

Average State Cigarette Tax

$1.76 per pack as of 2021.

Federal Cigarette Tax

$1.01 per pack as of 2021.

Impact of Competitors

Availability of alternatives affects consumer price sensitivity.

Law of Demand

Higher prices lead to lower quantity demanded.

Law of Supply

Higher prices lead to higher quantity supplied.

Consumer Reaction

Responses to price changes based on alternatives available.

Revenue Generation

Tax revenue influenced by elasticity of demand.

Cigarette Consumption

Decline in purchases due to increased taxes.

Netflix Subscription Changes

Increased costs led to consumer choice dilemmas.

Streaming Video Pricing

Monthly fees for digital content access.

Economic Example

Real-world scenarios illustrating elasticity concepts.

Bounce Comparison

Tennis ball vs. brick illustrates elasticity concept.

Quantity Demanded

Amount consumers are willing to buy at a price.

Quantity Supplied

Amount producers are willing to sell at a price.

Price Elasticity of Demand

Ratio of quantity demanded change to price change.

Price Elasticity of Supply

Ratio of quantity supplied change to price change.

Elastic Demand

Elasticity greater than one; high price responsiveness.

Inelastic Demand

Elasticity less than one; low price responsiveness.

Unitary Elasticity

Elasticity equals one; proportional price responsiveness.

Midpoint Method for Elasticity

Calculates elasticity using average percent changes.

Percentage Change in Quantity Demanded

Change in quantity demanded divided by original quantity.

Percentage Change in Price

Change in price divided by original price.

Absolute Value of Elasticity

Elasticity reported without negative sign for demand.

Price Increase Effect

Higher prices typically reduce quantity demanded.

Price Decrease Effect

Lower prices typically increase quantity demanded.

Demand Curve

Graph showing relationship between price and quantity demanded.

Supply Curve

Graph showing relationship between price and quantity supplied.

High Responsiveness

Indicates significant change in quantity with price change.

Low Responsiveness

Indicates minimal change in quantity with price change.

Price Elasticity Calculation

Percentage change in quantity over percentage change in price.

Negative Elasticity

Demand elasticity is always negative due to inverse relationship.

Example of Inelastic Demand

10% price increase results in 4.5% quantity decrease.

Example of Elastic Demand

Elasticity greater than one indicates significant quantity change.

Price Sensitivity

Consumer reaction to price changes affecting demand.

Sales Price Consideration

Firms assess demand impact before raising prices.

Cigarette Tax Analysis

Government evaluates tax effects on cigarette consumption.

Price Elasticity of Demand

Measures responsiveness of quantity demanded to price change.

Price Elasticity of Supply

Measures responsiveness of quantity supplied to price change.

Midpoint Formula

Calculates elasticity using average values for price and quantity.

Inelastic Demand

Demand elasticity less than 1, quantity changes less than price.

Elastic Demand

Demand elasticity greater than 1, quantity changes more than price.

Absolute Value of Elasticity

Elasticity expressed as a positive number, ignoring direction.

Slope of Demand Curve

Rate of change in quantity demanded relative to price change.

Percentage Change in Quantity

Change in quantity divided by original quantity, expressed as a percentage.

Percentage Change in Price

Change in price divided by original price, expressed as a percentage.

Elasticity between Points A and B

Measured as 0.45, indicating inelastic demand between these points.

Elasticity between Points G and H

Measured as 1.47, indicating elastic demand between these points.

Price Sensitivity

Degree to which quantity supplied changes with price change.

Unit Elastic Demand

Elasticity equal to 1, percentage changes in price and quantity equal.

Clear It Up Box

Clarifies common misconceptions about elasticity and slope.

Percentage Change Ratio

Elasticity is a ratio of two percentage changes.

High Price, Low Quantity

At upper demand curve, small quantity change is significant percentage.

Low Price, High Quantity

At lower demand curve, small quantity change is minor percentage.

3.5% Quantity Supplied Increase

Result of 1% price increase in apartment rentals.

Demand Curve Characteristics

Demand elasticity varies along a straight-line demand curve.

Landlord Supply Response

Increased from 10,000 to 13,000 units with price rise.

Price Elasticity Interpretation

Elasticity indicates how much quantity responds to price changes.

Elasticity

Responsiveness of quantity to price changes.

Inelasticity

Low responsiveness of quantity to price changes.

Infinite Elasticity

Quantity changes infinitely with any price change.

Perfectly Elastic Demand

Horizontal demand curve; infinite quantity at price.

Perfectly Elastic Supply

Horizontal supply curve; infinite supply at price.

Highly Elastic Goods

Goods with many substitutes or luxury items.

Examples of Highly Elastic Demand

Caribbean cruises and sports vehicles.

Zero Elasticity

No change in quantity despite price changes.

Perfectly Inelastic Demand

Vertical demand curve; quantity unchanged by price.

Perfectly Inelastic Supply

Vertical supply curve; supply unchanged by price.

Highly Inelastic Goods

Necessities with no close substitutes.

Examples of Highly Inelastic Demand

Life-saving drugs and gasoline.

Constant Unitary Elasticity

One percent price change equals one percent quantity change.

Midpoint Method

Calculates elasticity between two points on a curve.

Elasticity Equals 1

Percentage change in price equals percentage change in quantity.

Demand Curve Shape

Curved with steeper left and flatter right.

Percentage Change

Comparison of changes in price and quantity.

Quantity Demanded (Qd)

Total amount of a good consumers are willing to buy.

Quantity Supplied (Qs)

Total amount of a good producers are willing to sell.

Price Change Impact

Affects both quantity demanded and supplied.

Graph Classification

Analyzing graphs to determine elasticity type.

Elasticity Measurement

Ratio of percentage change in quantity to price.

Demand Curve Slope

Indicates elasticity; steeper means more inelastic.

Unitary Elasticity Demand Curve

Curved line where price and quantity change equally.

Unitary Elasticity Supply Curve

Straight line through origin with constant percentage changes.

Midpoint Method

Calculates percentage changes using average values.

Constant Unitary Elasticity

Elasticity remains constant across all points on curve.

Elasticity of Demand

Sensitivity of quantity demanded to price changes.

Elasticity of Supply

Sensitivity of quantity supplied to price changes.

Inelastic Demand

Demand changes little with price changes, e.g., housing.

Elastic Demand

Demand changes significantly with price changes, e.g., restaurant meals.

Revenue Impact of Elasticity

Elasticity affects total revenue from sales.

Short-run Elasticity

Elasticity measured over a brief time period.

Long-run Elasticity

Elasticity measured over a longer time horizon.