Econ Ch. 5 - Elasticity

What are the different types of elasticities?

1. Price elasticity of demand

2. Cross-price elasticity of demand

3. Income elasticity of demand

4. Price elasticity of supply

Price elasticity of demand (ED)

the measure of how responsive buyers are to price change

How to measure price elasticity of demand?

(% change of quantity demand) / (% change in price)

When ED >1

demand is elastic, meaning buyers are responsive to price change

When ED< 1

demand is inelastic, meaning buyers are not

responsive to price change

When ED = 1

unit elasticity

When ED = 0

perfectly inelastic, graph slope will be up and down

When ED = 100

perfectly elastic, graph slope will be side to side

What determines price elasticity of demand

1. Availability of substitutes

2. Necessities

3. Consumer Research

4. Time / Adjustment Period

How does availability of substitutes affect ED?

↑ availability of substitutes, ↑elastic of demand

How does necessities affect ED?

necessities ↑ elastic of demand

How does Consumer Research affect ED?

↑ time for research before purchase, ↑elastic of demand

How does time affect ED?

↑ adjustment period, ↑elastic of demand (elastic demand ↑ other time)

Cross-price elasticity of demand (Ex)

measures now responsive a demand of good is to price change of another

How to measure cross-price elasticity of demand?

(% change of quantity demand of good B) / (% change of quantity demand of good A)

What does it mean in Ex is positive?

the goods are substitutes

What does it mean in Ex is negative?

the goods are complements

Income elasticity of demand (Einc)

measures how responsive a demand of good is to income change

How to measure income elasticity of demand?

(% change of quantity demand) / (% change income)

What does it mean when Einc is positive?

the good is a normal good

What does it mean when Einc is negative?

the good is a inferior good

2 types of Normal goods?

1. Necessities

2. Luxury

How does necessities goods effect Einc?

↑ income, buys more of good (% of income spent on good ↓)

How does luxury goods effect Einc?

↑ income, buys more of good (% of income spent on good ↑)

Price elasticity of supply (Es)

measures how responsive sellers are to price change

How to measure Price elasticity of supply?

(% change of quantity supply) / (% change price)

What does it mean when Es >1

supply is elastic, meaning sellers are responsive to price change

What does it mean when Es <1

supply is inelastic, meaning sellers are not responsive to price change

What determines price elasticity of supply?

1. Inventory

2. Availability of inputs

3. Time / Adjustment time

How does inventory effect Es?

↑ inventory (easy to store), ↑elastic of supply

How does availability of inputs effect Es?

↑ availability of inputs , ↑ elastic of supply

How does time effect Es?

↑ adjustment time , ↑ elastic of supply