IB Econ - Unit 2: Microeconomics-Elasticities

Price Elasticity of Demand

A measure of how responsive the quantity demanded of a good or service is to a change in price

% Change in Qd / % Change in Price

Formula for PED

Elastic (PED)

PED>1

Inelastic (PED)

PED<1

Unit Elastic (PED)

PED = 1

Perfectly elastic (PED)

PED = infinite

Perfectly inelastic (PED)

PED = 0

Relatively elastic demand

Relatively inelastic demand

Perfect elastic demand

Perfectly inelastic demand

Equation for total revenue

price x quantity

Total revenue

Amount of money a firm earns for selling goods or services (Not profit)

Importance of PED for FIRMS

Firms can know if a change in price will help or harm them

YED/Income elasticity of demand

Measure of how responsive the quantity demanded of a good or service is to a change in consumers income

% Change in Qd / % change in income

Formula for YED

Elasticity of Demand: Normal Goods

always positive (-/- or +/+)

Elasticity of Demand: Inferior Goods

always negative (-/+ or +/-)

Elasticity of Demand: Necessities

Inelastic (Always needed)

Price Elasticity of Supply (PES)

Measure of how responsive the quantity supplied of a good or service is to a change in price

% Change in Sd / % Change in P

Formula for PES

Elastic (PES)

PES > 1

Inelastic (PES)

PES < 1

Unit Elastic (PES)

PES = 1

Perfectly Elastic (PES)

PES = Infinite

Pefectly inelastic (PES)

PES = 0

Relatively Elastic Supply

Relatively inelastic supply

Perfectly Elastic Supply

Perfectly Inelastic Supply

Determinants of price elasticity of supply: Time period - Short term

Inelastic

Determinants of price elasticity of supply: Time period - Long term

Elastic

Determinants of price elasticity of supply: Mobility of FOPs

More mobility = more elasticity

Determinants of price elasticity of supply: Unused capacity

Available idle resources vs. full capacity

Determinants of price elasticity of supply: Ability to store stock

Whether goods can be stockpiled or are perishable.

|n-o/o| x 100

percentage change

(X1 units - Price of Y1/unit before price change) - (X2 units - Price ofY2/units after price change)

Total revenue changed