Elasticity + First Exam Topics

Price Elasticity of Demand

Change in Q/Change in P

a measure of the responsiveness of quantity demanded to a change in price. ABSOLUTE VALUE

ceteris paribus

“everything else held constant”

Elastic

x < 1, change in price leads to a greater change in quantity, consumers are responsive to price changes, generally the left half of a downward, linear slope.

Numerator < Denominator = Decimal

Inelastic

x > 1, change in price leads to a greater change in quantity, consumers are not responsive to price changes, generally the right half of a downward, linear slope.

Numerator > Denominator = Whole Number

Unit Elastic

x = 1, percentage change in quantity demanded or supplied is exactly equal to the percentage change in price, generally the midpoint of a downward, linear slope.

Numerator = Denominator, fraction equals 1.

Total Revenue Equation

Price x Quantity = Total Revenue

Perfectly Inelastic

x = 0, vertical line, price fluctuates, no change in quantity demanded.

Ex: life saving drugs

Perfectly Elastic

x = infinity, horizontal line, demand fluctuates, no change in price

Ex: Two vending machines (goods with perfect substitutes)

Factors that influence price elasticity of demand

• Availibility of substitute

• Proportion of income spent on good

• Time elapsed since price change

Income Elasticity

% change in quantity supplied/% change in price

Measure of a quantity supplied to a change in price

Normal Good: X > 1, 0 < X < 1
Inferior Good: X < 0

Normal Good

Demand increases with increased income

Inferior Good

Demand decreases with increased income