Econ 102 - Chapter 5: Elasticity

What does Elasticity measure?

Elasticity measures a percent change in one variable with respect to a percent change in another variable.

Price Elasticity of Demand

How sensitive (or flexible) is QD to a change in Price (in %)

=ED = (%ΔQD)/(%ΔP)

always negative (or 0)

What are the determinants of price elasticity of demand?

- More substitutes means a good has more elastic/flexible demand.

-Bigger (%) of budget --> More elastic demand

- More time allowed --> More elastic demand (More Substitutes)

Necessary goods would be less elastic

What are some examples of more substitutes means a good has more elastic/ flexible demand?

Ex. Sodas, Gas Stations, Juice

What are some examples of bigger % of budget means more elastic demand?

Ex. Apartment rent, TV

Ex. If candy prices changes by 10%, may not impact QD by as much

What are some examples of more timed allowed mean more elastic demand?

Ex. Steam offers massive sales (90%) on old games the people may not be rushed to buy.

What are some examples of Necessary goods would be less elastic?

Ex. Consider demand for gas after it doubles in price.

Immediately: Forced to buy gas if needed (very inelastic)

Short-run: Can adjust partially by driving less, using bus, biking (more elastic)

Long-run: Adjust fully by buying an electric car, moving (very elastic)

Is the demand for tickets to see your favorite concert elastic or inelastic?

Inelastic (favorite, so no substitutes and experience is important)

(concerts are mostly inelastic for famous events)

Is demand for a BMW28 elastic or inelastic?

Elastic (Many similar cars + big part of income)

Is demand for roadside car assistance elastic or inelastic?

Inelastic (needed in short run)

Is a car battery elastic or inelastic?

Inelastic (General, so inelastic, if brand-name more elastic) (Necessary, Inexpensive)

Is Health Care elastic or inelastic?

Inelastic (Necessary, no substitutes)

Is clothing at Old Navy elastic or inelastic?

Elastic (lots of substitutes)

Percent Formula:

%Δ in QD = (Δ in QD)/(initial QD) x 100

= (Q2-Q1)/(Q1) x 100

%Δ in P = (ΔP)/(initial P) x 100

= (P2-P1)/(P1) x 100

Midpoint formula (approximation)

%Δ in QD = (Δ in QD)/(midpoint of Q1, Q2) x 100

= (Q2 - Q1)/((Q1 + Q2)/2) x 100

(Price is same, but with price)

See notebook for example calculation + extra material (Three pages)

Income Elasticity of Demand

Measures how a change in income affects quantity demanded for a good.

EI = (%ΔQD)/(%Δ in Income (I))

EI can be positive or negative

A good is normal if...?

EI > 0 (income increases, demand increases)

Normal good subcategories:

A good is a necessity if...?

A good is a luxury if...?

0 < EI < 1

EI >1

A good is inferior if...?

EI < 0 (Income increases, demand decreases)

TPS:

State whether you think each of the following are inferior, necessity, or luxury

1. Steak

2. Toothpaste

3. Fast Food

4. Pedicures

5. New vehicle

6. Cup ramen

7. Lawn-care service

8. Greyhound Bus

9. Gasoline

10. Cigarettes

11. Lottery Tickets

1. Luxury

2. Necessity

3. Inferior

4. Luxury

5. Luxury

6. Inferior

7. Luxury

8. Inferior

9. Necessity

10. Inferior (More education --> less smoking)

11. Inferior (Same idea as above)

Suppose that Doug receives a pay increase at work and income increases by 20%. As a result, Doug decides to consume 12% less ground beef. For Doug, what kind of good is ground beef?

Inferior (EI = -3/5 < 0)

Cross-price Elasticity of Demand

Measures the responsiveness of QD of one good to a change in the price of another good.

EC = (%ΔQD of one good)/(%ΔP of a different good)

EC can be positive or negative

A good is a substitute if...?

EC > 0

A good is a complement if...?

EC < 0

When the price of chicken increases, it is observed that less rice is purchased. What is true?

EC < 0 and chicken and rice are complements

Price Elasticity of Supply

Responsiveness of QS to change is price.

ES = (%ΔQS)/(%ΔP)

This is mainly determined by time and the adjustment process to price. Also determined by flexibility of producers in bringing goods to market.

ES is greater than or equal to zero

See Notes for graphs and number information