Economics: Price, Cross-Price, and Income Elasticity of Demand and Supply

What is elasticity?

A measure of how much consumers and producers will respond to a change in market conditions. Also used to measure a respond to a change in price of a good.

Price elastsity of demand

Describes the size of the change in the quantity demanded of a good or service when its price changes. Qd decreases when price increses

More elastic

when consumers are higly influnced by price

Less elastic

When consumers are NOT sentsistive to price change

Calculating PED

PED= % change in Q demanded / % chnage in P

Determinates of PED

-availability of substitutes

-degree of necessity

-cost relavtive to income

-adjustment time

-scope of the market

Availability of Substitutes

More substitutes lead to more elastic demand.

Degree of nessticity

When a good is a basic necessity, people will buy it even if the price rises, making it NOT very elastic

when a good is a luxgry it is more elsatic

Cost relative to income

All else held equal, if consumers spend a very small share of their incomes on a good, their demand for the good will be less elastic than otherwise.

Adjustement time

Goods often have much more elastic deamnd over the long run that in the short run

Perfeclty elastic curve

the quantity demanded drop to 0 when the price increses even a tiny amaount, will be horizontal

perfectly inelastic

The quantity demanded is the same no matter what the price; this curve will be vertical

Elastic demand

PED = greather than one

Inelastic deamnd

PED= less than 1

unit elastic

PED= exactly 1

Total revenue

The total amount of money a firm receives by selling goods or services. quantity sold x the price paid

Quantity effect:

decrese in revenue that reults from selling fewier units of the good

price effect

an increse in revenue that reults from reciving a hight price for each unit

drop in reveue

Quantity effect outweighs the price effct; a price increase will cause a drop in revenue

raise toatal reveue

When the price effect outweighs the quantity effect, a price increase will raise toatal reveue

Elstaic demand

causes total reveuene to fall

Inelastic demand

causes total revenue to rise

Price elasticity of demand

the size of the change in quantity supplied of a good or service when its price changes

Calculating PES

PES= % chnage in quantity supplied / % change in price

Determinates of PES

-availability of inputs

-flexibility of the production process

-adjustment time

cross-price elasticity of demand

Describes how much demand chanages when the price of a diffrent good changes

Cross-PED between A and B

% change in quantity A demanded / % chnage in price of B

Income elastisity of demand

Describes how much the quantity demanded changes in response to a change in consumers

Income ED

% chnage in quantity demanded / % in income