Demand Elasticity

  • Elasticity of Demand: Measures responsiveness of Quantity Demanded (QD) to price changes.
  • Elastic Demand: Large QD change from price change.
  • Inelastic Demand: Small QD change from price change.

Defining and Measuring Elasticity

  • Price Elasticity of Demand calculated via % change in QD and % change in Price.
  • Elasticity Interpretation:
    • > 1 (absolute value): Demand is elastic.
    • < 1 (absolute value): Demand is inelastic.
    • = 1 (absolute value): Demand is unit elastic.
  • Example: Vaccinations show low elasticity (Price Elasticity = 0.2).

Elasticity Types

  • Perfectly Inelastic Demand: QD unresponsive to price changes (vertical curve).
  • Perfectly Elastic Demand: Any price change leads to QD = 0 (horizontal curve).

Importance of Elasticity

  • Affects Total Revenue (TR = Price x Quantity Sold).
  • Price Inelastic Goods: Increase in price => Increase in TR.
  • Price Elastic Goods: Increase in price => Decrease in TR.

Factors Affecting Price Elasticity of Demand

  1. Availability of close substitutes: Yes (high elasticity), No (low elasticity).
  2. Good as a luxury item: Yes (high elasticity), No (low elasticity).
  3. Income proportion spent: Large (high elasticity), Small (low elasticity).
  4. Time since price change: Long run (higher elasticity), Short run (lower elasticity).

Other Elasticities

Cross Price Elasticity

  • Measures impact of price changes in one good on another (substitutes/complements).
  • Formula: Cross-price elasticity = % change in QD of A / % change in Price of B.
  • Substitute Goods: Positive cross-price elasticity (e.g., hot dogs and hamburgers).
  • Complementary Goods: Negative cross-price elasticity (e.g., hot dogs and hot dog rolls).

Income Elasticity of Demand

  • Normal Goods: Increase in Income => Increase in Demand (Elasticity > 1) or Elasticity < 1.
  • Inferior Goods: Increase in Income => Decrease in Demand (Elasticity negative).