Understanding Price Elasticity in Economics

Elasticity

Responsiveness of Qd or Qs to determinants.

Price Elasticity of Demand

△%Qd divided by △%P.

Percent of Change Formula

[(end value - start value) / midpoint] * 100.

Substitutes

Goods that can replace each other.

Narrowly Defined Goods

More substitutes available, higher elasticity.

Broadly Defined Goods

Fewer substitutes available, lower elasticity.

Necessities

Essential goods, lower price elasticity.

Luxuries

Non-essential goods, higher price elasticity.

Short Run Elasticity

Limited consumer response to price changes.

Long Run Elasticity

Greater consumer adjustments over time.

Flatter curves

greater elasticity

Revenue Formula

R = p*q

Higher price

Lower revenue

Elastic Demand

Price elasticity of demand greater than 1.

Inelastic Demand

Price elasticity of demand less than 1.

Price Elasticity of Supply

% change in Qs divided by % change in P.

Time Factor in Supply

Long-run elasticity usually higher than short-run.

Income Elasticity of Demand

% change in Qd divided by % change in income.

Normal Goods

Income elasticity greater than 0.

Inferior Goods

Income elasticity less than 0.

Cross-Price Elasticity of Demand

Response of demand for one good to another's price.

Substitutes in Cross-Price Elasticity

CPE greater than 0 indicates substitutes.

Complements in Cross-Price Elasticity

CPE less than 0 indicates complements.