Elasticity

Price Elasticity of Demand

Measure of the responsiveness of quantity demanded to a change in price.

Necessities vs Luxuries

Necessities are more inelastic, while luxuries are more elastic in demand.

Availability of Close Substitutes

More substitutes lead to more elastic demand; fewer substitutes lead to less elastic demand.

Market Definition

A broader market definition (e.g., all toothpaste) is more inelastic than a narrow definition (e.g., just Colgate).

Time Horizon

Demand is more elastic in the long run compared to the short run due to the ability to change products.

Fraction of Income Spent

Small fractions of income spent on goods lead to inelastic demand; large fractions lead to elastic demand.

Brand Loyalty

Higher brand loyalty results in less elastic demand; lower loyalty results in more elastic demand.

Total Revenue

Total revenue is calculated as price of good multiplied by quantity sold.

Elastic Demand

When price increases, total revenue decreases; when price decreases, total revenue increases.

Inelastic Demand

When price increases, total revenue increases; when price decreases, total revenue decreases.

Unit Elastic Demand

Total revenue remains unchanged when price changes.

Income Elasticity

Measures how quantity demanded responds to changes in consumer income.

Normal Good

Quantity demanded increases with an increase in consumer income.

Inferior Good

Quantity demanded decreases with an increase in consumer income.

Cross-Price Elasticity of Demand

Measures how quantity demanded of one good responds to a change in the price of another good.

Price Elasticity of Supply

Measures how quantity supplied responds to a change in price.

Elastic Supply

Quantity supplied responds substantially to price changes.

Inelastic Supply

Quantity supplied responds minimally to price changes.

Determinants of Price Elasticity of Supply

Time horizon and availability of close substitutes/flexibility for inputs.

Supply Bottlenecks

Occur in markets with highly inelastic supply, leading to significant price increases during high demand.

Market Signals

Prices guide decisions and allocate scarce resources in market economies.