Econ Chapter 5

Elasticity

A measure of how much buyers and sellers respond to changes in market conditions

Price Elasticity of Demand

A measure of how much the quantity of a good responds to a change in price. Steep slopes are inelastic. Flatter slopes are elastic.

Formula for Price Elasticity of Demand

Percentage change in quantity demanded divided by percentage change in price

Factors that increase elasticity

Close substitutes

Luxury

Narrow

Long run

Factors that decrease elasticity

No substitutes

Necessity

Broad

Short run

Formula for change in price/quantity (%)

new - initial / ((new + initial) ÷ 2) x 100

Elastic

price elasticity of demand > 1

Unit Elastic

price elasticity of demand = 1

Inelastic

price elasticity of demand < 1

Perfectly Inelastic

demand curve is vertical

Perfectly Elastic

demand curve is horizontal

Total Revenue

Amount paid by buyers and received by the sellers of a good. (PxQ)

• Inelastic, total revenue moves same direction as price

• Elastic, total revenue moves in opposite direction of price

Income Elasticity of Demand

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

• normal goods have positive income elasticities

• inferior goods have negative income elasticities

Income of Elasticity Demand Formula

Change in quantity demanded / change in consumer income

Cross Price Elasticity of Demand

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

• Substitutes have positive cross price elasticities

• Complements have negative cross price elasticities

Price Elasticity of Supply

How much quantity supplied of a good responds to a change in its price

• supply is elastic in the long run