Demand Elasticity

Demand Elasticity

Measures how sensitive buyers are to changes in price

Cross-Elasticity

Measures how sensitive demand is to changes in prices of competing products

Elasticity and Slope

Elasticity is independent of units, unlike slope in a demand curve

Price Change Impact

Elasticity helps estimate quantity and revenue changes resulting from price changes

Elasticity Calculation

Calculated as the percentage change in quantity divided by the percentage change in price

Elasticity Illustration

Illustrated by |ϵ| > 1, |ϵ| = 1, and |ϵ| < 1, indicating different levels of responsiveness

Constant Elasticity

Illustrated by ϵ = −∞, |ϵ| > 1, and |ϵ| < 1, showing different degrees of responsiveness

Elasticity, Price, and Revenue

Revenue change ≈ ∆p + ϵ∆p; Revenue rises if ϵ < −1, falls if ϵ > −1, unchanged if ϵ = −1, linking elasticity to changes in price and revenue

Cross-Price Elasticity

Measures how sensitive demand for a product is to changes in prices of competing products

Income Elasticity

Measures how sensitive demand is to changes in consumer income

Inferior Good

A good with income elasticity < 0, indicating a decrease in demand as consumer income increases

Normal Good

A good with income elasticity > 0, indicating an increase in demand as consumer income increases

Necessity

A good with 0 < income elasticity < 1, indicating a moderate increase in demand as consumer income increases

Luxury

A good with income elasticity > 1, indicating a significant increase in demand as consumer income increases

Gasoline Demand Elasticity

Based on the formula log q = −1.697 − 0.042 log p + 0.530 log y, showing the relationship between quantity demanded, price, and consumer income

Gasoline Demand Growth

Expected growth using the elasticity formula z = ϵzx dx, demonstrating how elasticity influences demand growth

Elasticity Takeaways

Measures sensitivity to price changes and is useful for computing the impact on quantity and revenue