Chapter 4: Elasticity

Price Elasticity of Demand (E_D)

how much will consumers react when prices change?

E_D equation & midpoint method

(%ΔQ_D)/(%ΔP); [(Q₂ - Q₁)/AvgQ]/(P₂ - P₁)/AvgP] → always negative

|E_D| < 1, |E_D| > 1, |E_D| = 1, |E_D| = 0, |E_D| = infinity

inelastic, elastic, unit elastic, perfectly inelastic, perfectly elastic

Determinants (what makes demand elastic or inelastic)

1. Availability of substitutes

2. Percent of Budget/Income

3. Adjustment time

Graphing: Elastic demand, inelastic demand, Perfectly elastic demand, Perfectly inelastic demand

flat, steep, horizontal, vertical

Total revenue

P x Q (can use this to calculate if you should change prices or not based on how elastic the good is)

Elasticity of supply

How will firms respond to higher prices?

E_S equation

(%ΔQ_S)/(%ΔP) → always positive

E_S < 1, E_S > 1, E_S = 1, E_S = 0, E_S = infinity

inelastic, elastic, unit elastic, perfectly inelastic, perfectly elastic

Determinants: what makes SUPPLY easier

Availability of inputs, flexibility of production, adjustment time

Graphing: elastic supply, inelastic supply, perfectly elastic supply, perfectly inelastic supply

flat, steep, horizontal, vertical

Income elasticity of Demand

how much will you reach when INCOME changes?

E_I equation

(%ΔQ_D)/(%ΔIncome)

E_I < 0, 0 < E_I < 1, E_I > 1

inferior goods, normal goods, luxury goods

Cross-price elasticity of demand

how consumers react to a change in price of a related good (E_xy = (%ΔQ_x)/%ΔP_y)

E_xy < 1, E_xy > 1

Goods are complements, goods are substitutes