Elasticity

Defining elasticity

 the responsiveness of demand and supply

Price elasticity of demand

 the responsiveness of demand to a change in price

Market supply and demand

The effect on price of a shift in supply depends on:

the responsiveness of demand to a change in price

Price elasticity of demand (4)

 measurement

 use of proportionate or percentage changes

 the sign (positive or negative)

 the value (greater or less than one)

Price elasticity of demand

 measurement

proportionate (or %) Q_d / proportionate (or %) P

Determinants of price elasticity of demand (Pε_D)

 number and closeness of substitute goods

 the proportion of income spent on the good

 time

Price elasticity of demand and consumer expenditure (P × Q) (5)

 effects of a price change on expenditure: elastic demand

 effects of a price change on expenditure: inelastic demand

 special cases

 applications to price decisions

 different elasticities along a demand curve

Elastic demand between two points

Expenditure falls as price rises

Inelastic demand between two points

Expenditure rises as price rises

Price elasticity of demand and consumer expenditure (P × Q)

 special cases (3)

totally inelastic demand: Pε_D = 0

infinitely elastic demand: Pε_D = ∞

unit elastic demand: Pε_D= –1

Totally inelastic demand

PED = 0

Infinitely elastic demand

PE_D=∞

Unit elastic demand (2)

PE_D= -1

Expenditure stays the same as price changes

Different elasticities along different portions of a demand curve

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Measurement of elasticity: arc elasticity (4)

 the formula for price elasticity of demand ΔQ/Q ÷Δ P/P

 using the average or ‘mid-point’ method ΔQ/mid Q ÷ ΔP/mid P

 the elasticity of a curved demand curve dQ/dP is the tangent to the curve

 different elasticities along a straight-line demand curve

Price elasticity of supply (3)

 measurement

 determinants

 applications

Price elasticity of supply

 measurement

Δ/QS ÷ ΔP/P

Price elasticity of supply

 determinants (2)

the amount that costs rise as output rises

time period

Income elasticity of demand (3)

 measurement

 determinants

 applications

Income elasticity of demand

 measurement

 ΔQ_D/Q_D ÷ ΔY/Y

Income elasticity of demand

 determinants (2)

degree of necessity

proportion of income spent on the good

Cross-price elasticity of demand

 measurement

ΔQ_Da /Q_Da ÷ ΔP_b /P_b

determinants

closeness as substitutes or complements

 applications