ECON Elasticity

Definition of elasticity according to Gabay et al.

it measures the responsiveness of one variable to a certain change of another variable

Who first formalized the concept of elasticity in economics

Alfred Marshall

Definition of price elasticity of demand

Measures the responsiveness of the quantity demanded to a change in price of a particular service or product

Formula for the price elasticity of demand

Price elasticity of demand = Q2-Q1/Q1 / P2-P1/P1

Formula for arc elasticity

Arc elasticity = (Q2-Q1)/(P2-P1) x {(P1+P2)/2} / {(Q1+Q2)/2}

Degree of PEd when the elasticity coefficient is greater than 1

Elastic

Degree of PEd when the elasticity coefficient is equal to 1

Unitary Elastic

Degree of PEd when the elasticity coefficient is less than 1

Inelastic

Degree of PEd when the elasticity coefficient is infinite, when demand is totally responsive to any changes

Perfectly Elastic

Degree of PEd when the elasticity coefficient is equal to 0, when demand does not respond to any changes

Perfectly Inelastic

Determinants of Price Elasticity of Demand

The importance or degree of importance

Number of available substitutes

The proportion of income in price changes

The time period

The only classes of goods which have a price elasticity of demand greater than 0 (not negative)

Veblen and Giffen goods

Definition of income elasticity of demand

The responsiveness of quantity demanded in response to a change in income

Formula for income elasticity of demand

YEd = Q2-Q1/Q1 / Y2-Y1/Y1

A good is considered what if its income elasticity is positive

Normal good

A good is said to be what if its income elasticity is negative

Inferior

Normal goods which have an income elasticity coefficient greater than 1

Luxury goods

Normal goods which have an income elasticity coefficient of less than 1 but is still positive

Necessity good

Definition of cross price elasticity of demand

Measures the responsiveness of consumers in quantity demanded of certain products if the price of another product changes

Equation of cross price elasticity of demand

Exy = Qdx2-Qdx1/Qdx1 / Pdy2-Pdy1/Pdy1

The goods are considered what if its cross price elasticity coefficient is negative

Complementary

The goods are considered what if its cross price elasticity coefficient is is positive

Substitute

The goods are considered what if its cross price elasticity coefficient is 0 or near 0

Unrelated

Definition of Price Elasticity of Supply

measures the responsiveness of quantity supplied in response to a change in the price of the products

Degree of price elasticity of supply when a change in price leads to a greater change in quantity supplied

Elastic

Degree of price elasticity of supply when a change in price leads to a lesser change in quantity supplied

Inelastic

Degree of price elasticity of supply when a change in price leads to an equal amount of supply

Unitary supply

Degree of price elasticity of supply when there is no change in price and an infinite change in quantity supplied

Perfectly Elastic

Degree of price elasticity of supply when a change in price has no effect on quantity supplied

Perfectly Inelastic

Determinants of price elasticity of supply

Time period which is distinguished as: Monetary or intermediate, short-run, and long-run