PrereqEcon W1 Elasticity

Talking about Elasticity

Elasticity

Measures the magnitude of responsiveness of a certain variable.

Important to remember about elasticity

although price is the dependent variable, higher elasticity will mean a smaller change in price, so it acts as an independent one.

Price Elasticity of demand

measures how sensitive quantity demanded is to a change in price

Formula for Price Elasticity in demand

PED= (percent change in quantity demanded)/(percent change in price)

Elastic ( 3things)

good is sensitive to price changes

PED>|1|

curve is relatively flat, people will buy at a certain price

Inelastic (3)

Good is not sensitive to price

PED is between 0 and 1

curve is steep, ppl will buy no matter the price

Unit Elasticity (3)

Any change in price is equal to the change in demand

PED=1

Curve is -1 or 1

Perfectly Inelastic (3)

Demand doesn’t change regardless of price

PED=0

curve is vertical

Income elasticity of demand

measures how demand changes when income changes

Income elasticity of demand formula

YED= (%change in Quantity demanded)/(%change in income)

Normal Good

when income elasticity of demand is >0

Inferior Good

when income elasticity of demand is <0

Cross-price elasticity

How quantity demanded changes when the price of a related good changes

Cross price elasticity formula

XED= %change quantdemand B/ %change price A`

If cross price elasticity is positive….

goods are substitutes

If cross price elasticity is negative…

goods are compliments

Price Elasticity of Supply

measures how sensitive supply is to a change in price

Price Elasticity of Supply formula

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

Draw the 5 curves of elasticity (perf elastic, elastic, unit elastic, inelastic, perf inelastic)

Go do it on a sheet of paper you lil freak.

Perfectly Elastic

Any change in price results in a complete loss of demand

Elasticity= infinity

Curve is a flat line at given price

1. When demand is inelastic, demand…

2. Who wins?

1. will not change too much based on price change

2. producers win

When demand is elastic, demand …

Who wins?

1. changes a lot based on price

2. consumers win

Supply curve shifts, demand is elastic

equilibrium price and quantity don’t change much

Supply curve shifts; demand is inelastic

Equilibrium price and quantity change by a lot

Tax: demand is more inelastic than supply…

tax and incurrent cost is passed to consumers

Tax: demand is more elastic than supply…

tax and incurred cost is passed to producers

1. Elasticity in the short run (2)

2. why?

1. More inelastic, market is less sensitive to prices

   1. Not easy to make immediate price changes and purchasing decisions.

1. Elasticity in the long run

2. why?

1.Elasticity is higher, market is more sensitive to prices.

2.It is easier to make different purchasing options, market has time to recover.

tax incidence

manner in which the tax burden is divided between buyers and sellers

Why is the demand curve with constant unitary elasticity concave?

the absolute value of declines in price are not identical. The left side of the curve starts with high prices, and then price falls by smaller amounts as it goes down toward the right side. This results in a slope of demand that is steeper on the left but flatter on the right, creating a curved, concave shape.

Why is the supply curve with constant unitary elasticity a straight line?

the curve slopes upward and both price and quantity are increasing proportionally.

when there is unit elasticity, a company should…

maintain it’s price because this means revenue is already maximized