Chapter 5: Elasticity; ties back to Law of Supply and Demand

How the market reacts to a change in variable

A reaction to change in the behavior of buyers and sellers in response to a price change for a good or service.

Elasticity

the ratio between the percentage change in quantity demanded or supplied and the corresponding change in price

E’ = Pc(*100)/Qc(*100)

Price Elasticity

Calculating Elasticity is the slope of a curve

NOT Calculated on the percentage change, which is different calculation from the slope and has different meaning

the percentage change in the quantity demanded of a good or service divided by the percentage change in the price

Price Elasticity of demand

the percentage change in the quantity supplied of a good or service divided by the percentage change in the price

Price Elasticity of supply

Elasticity is greater than 1 -> high responsiveness to changes in price; sensitive to price changes; large change in quantity

Elastic demand/supply

Elasticity is less than 1 -> low responsiveness to change in price; insensitive to price changes; small change in quantity

Inelastic demand/supply

=1; proportional responsiveness of either demand or supply

Unitary elasticity

The quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all. Horizontal in appearance.
Supply - goods easily available like pizza, bread, books

Demand - luxury goods, goods like cruises, airplane fars

Infinite elasticity “perfect elasticity”

The extreme case in which a percentage change in price, no matter how large, results in zero change in quantity. Vertical in appearance.

Supply - diamond rings, housing in prime locations

Demand necessities with no close substitutes like life-saving drugs or gasoline

Zero elasticity “perfect inelasticity”

manner in which the tax burden is divided between buyers and sellers

Supply -more inelastic than demand, sellers bear the tax burden (soft drink tax)

Demand - more inelastic than supply, consumers bear the tax burden (beachfront hotels)

Tax incidence

Typically must accept prevailing prices. Comparing apples to oranges

price-takers

Elasticities are often lower in the______ than in the longrun.

short-run

On ________ side, it can sometimes be difficult to change the quantity demanded in the short run, but easier in the long run (i.e. energy consumption)

Demand

On the _______ side, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months; in the short run, it can be costly or difficult to build a new factory, hire many new workers, or open new stores

Supply

Income ________________ measures the responsiveness of the quantity demanded for a good or service to a change in the income of the people demanding the good, ceteris paribus.

elasticity of demand

For most products, the income elasticity of demand is positive; a rise in income will cause an increase in the quantity demanded

normal goods

When the income elasticity of demand is negative

inferior goods

Cross-price ___________he percentage in the quantity of good A that is demanded as a result of a percentage change in the price of good B.

elasticity of demand

Substitute ___ have positive cross-price elasticity of demand: if good A is a substitute for good B (like coffee and tea), then a higher price for B will mean a greater quantity consumed of A

goods

Complement ____ have negative cross-price elasticity of demand: if good A is a complement for good B (like coffee and sugar), then a higher price for B will mean a lower quantity consumed of A

goods

Wage elasticity of ________(the percentage change in hours worked divided by the percentage change in wages) will determine the shape of the labor supply curve

labor supply

Elasticity of _______(the percentage change in the quantity of savings divided by the percentage change in interest rates) will determine the shape of the supply curve for financial capital

savings