ECON10010 lectures 5 and 6: elasticities

Price elasticity of Demand (PED) definition

% change in quantity demanded divided by corresponding % change in its price

High demand elasticity, low demand elasticity

large negative number, small negative number

PED formula

% change in quantity demanded

---

% change in price

Demand Elasticity

same as PED

PED is always

negative, but sometimes the minus sign is omitted for brevity

PED is

high at high prices and low at low prices

Own price elasticity of demand: Elastic demand

>-1

Own price elasticity of demand: inelastic demand

between -1 and 0

unit elastic

-1 exactly

Factors affecting elasticity

Ease of substitution and necessity of good

shortage

excess demand

surplus

excess supply

Inelastic demand slope

more steep

Elastic demand slope

more horizontal

total consumer spending (total revenues received by suppliers)

P X QD

price effect

each unit of a good is sold at a lower price, decreasing total spending

quantity effect

after the price cut, more units are sold, raising total spending

does price or quantity effect dominate?

quantity effect

Income elasticity of demand for a normal good

positive

Income elasticity of demand for an inferior good

negative

Income elasticity of demand for a luxury good

greater than 1

Income elasticity of demand

% change in QD divided by % change in consumer income

Income elasticity of demand for a necessity good

between 0 and 1