Eco 101 Chapter 5

Elasticity and Its Application

Elasticity

Measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Price Elasticity of Demand

Measures how much the quantity demanded responds to a change in the price

Elastic Demand

Quantity demanded responds substantially to price changes

Inelastic

Quantity demanded responds only slightly to price changes

Availability of Close Substitutes

Elastic demand: Goods with close substitutes

Inelastic demand: Goods with no close substitutes

Necessities and Luxuries

Elastic demand: Luxuries

Inelastic demand: Necessities

Defining the Market Broadly or Narrowly

Elastic: Narrowly defined markets

Inelastic: Broadly defined markets

Time Horizon

More elastic demand: Longer time horizons

Less elastic demand: Shorter time horizons

Total Revenue

Amount paid by buyers and received by sellers of a good

Price of the good times quantity sold (P x Q)

Total Revenue and the PED

Price and total revenue move in opposite directions for elastic demand

Price and total revenue move in the same direction for inelastic demand

Unit elastic demand is when prices change and the total revenue remains constant

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in consumers income

The Cross Price Elasticity of Demand

A measure of how much the quantity demanded of one good responds to a change in the price of another good

Price Elasticity of Supply

Measures how much the quantity supplied of a good responds to a change in the price of that good

Elastic Supply

Quantity supplied responds substantially to price changes

Inelastic Supply

Quantity supplied responds only slightly to price changes

Determinants of Price Elasticity of Supply

Depends on the flexibility of sellers to change the amount they produce

Short run: Quantity supplied is not very responsive to changes in price

Long run: Quantity supplied responds substantially to price changes