HomeEcon Chapter 6: Describing Supply & Demand: Elasticities Price Elasticity Price Elasticity of demand `the percentage change in quantity demanded divided by the percentage change in price ED= % change in quantity demanded / % change in price Price elasticity of supply The percentage change in quantity supplied divided by the percentage change in price ED= % change in quantity supplied / % change in price Price elasticity is the change in quantity divided by the percentage change in price As elasticity increases, quantity responds more to price changes Classifying Demand and Supply as Elastic or Inelastic Elastic If the percentage change in quantity is greater than the percentage change in price (E > 1) Inelastic If the percentage change in quantity is less than the percentage change in price (E < 1) Example Hulu & Netflix If Hulu raised prices quantity demanded will fall a lot as people will shift to Netflix The demand for Hulu would be highly elastic Elasticity is Independent of Units Elasticity measures the %, not the unit, change in variables Using % allows us to measure responsiveness independent of units, making comparisons among different goods easier Calculating Elasticities Case 1 When orange county, Florida, raised the price of it’s toll roads by 14%, the number of motorists using toll roads fell by only 1.8 percent .13, E < 1= Inelastic Case 2 When gasoline prices rose by 10% in washington, DC, the quantity of gasoline demanded there fell by 40% 4, E > 1 = Elastic Endpoint problem The % change differs depending on whether you view the change as a rise or a decline Economists use the average of the two end values to get around the endpoint problem Example V Elasticity is not the same as slope The steeper the curve becomes at any given point- the less elastic supply or demand is Perfectly inelastic quantity does not respond at all to the changes in price Curves that are vertical Perfectly elastic Quantity responds enormously to changes in price (sensitive) Horizontal curves are elastic Unit elastic percentage change in quantity equals the percentage change in price 5 terms to describe elasticity Perfectly elastic Quantity responds enormously to changes in price (E=) Elastic % change in quantity exceeds the % change in price (E>1) Unit elastic % change in quantity is the same as the percentage change in price (E=1) Inelastic E <1 Perfectly inelastic E=0 Substitution & Elasticity Most important determinant of price elasticity of demanded is the number of substitutes for the good The more substitutions a good has, the more elastic demand is its demand Example Subsisting a big mac for a whooper Substitution & Demand The number of substitutes a good has is affected by several factors 1. The time period being considered 2. The degree to which a good is a luxury 3. The market definition The importance of the good in one’s budget How Substitution Factors Affect Specific Decisions In the long run, demand generally becomes more elastic Elasticity, Total Revenue, and Demand The total revenue a supplier receives is the price they charge times the quantity they sell Elasticity tells sellers what will happen to total revenue if their price changes If demand is elastic - a rise in price lowers total revenue If demand is unit elastic - a rise in price leaves total revenue unchanged If demand is inelastic - a rise in price increases total revenue Total Revenue along a Demand Curve With elastic demands, a rise in price decreases total revenue With inelastic demands, a rise in price increases total revenue Income and Cross-Price Elasticity Income elasticity of demand Tells us the responsiveness of demand to changes in income Normal goods Goods whose consumption increases with an increase in income Income elasticity of demand shows the responsiveness of demand to changes in income Luxury A good that has income elasticity greater than 1 Its percentage increase in demand is greater than the percentage increase in income Necessity A good that has an income in elasticity between 0 &1 The consumption of a necessity rises by a smaller proportion than the rise in income Inferior goods Goods whose consumption decreases when income increases Cross-Price Elasticity of Demand Cross-price elasticity of demand Shows the responsiveness of demand to changes in prices of related goods Substitutes Goods that can be used in place of another When the price of a good goes up, the demand for the substitute goes up Substitutes have positive cross-price elasticities Complements Goods that are used in conjunction with other goods A fall in the price of a good will increase the demand for its complement Compliments have negative cross-price elasticities Some Examples Elasticity and Shifting Supply and Demand

Econ Chapter 6: Describing Supply & Demand: Elasticities Price Elasticity Price Elasticity of demand `the percentage change in quantity demanded divided by the percentage change in price ED= % change in quantity demanded / % change in price Price elasticity of supply The percentage change in quantity supplied divided by the percentage change in price ED= % change in quantity supplied / % change in price Price elasticity is the change in quantity divided by the percentage change in price As elasticity increases, quantity responds more to price changes Classifying Demand and Supply as Elastic or Inelastic Elastic If the percentage change in quantity is greater than the percentage change in price (E > 1) Inelastic If the percentage change in quantity is less than the percentage change in price (E < 1) Example Hulu & Netflix If Hulu raised prices quantity demanded will fall a lot as people will shift to Netflix The demand for Hulu would be highly elastic Elasticity is Independent of Units Elasticity measures the %, not the unit, change in variables Using % allows us to measure responsiveness independent of units, making comparisons among different goods easier Calculating Elasticities Case 1 When orange county, Florida, raised the price of it’s toll roads by 14%, the number of motorists using toll roads fell by only 1.8 percent .13, E < 1= Inelastic Case 2 When gasoline prices rose by 10% in washington, DC, the quantity of gasoline demanded there fell by 40% 4, E > 1 = Elastic Endpoint problem The % change differs depending on whether you view the change as a rise or a decline Economists use the average of the two end values to get around the endpoint problem Example V Elasticity is not the same as slope The steeper the curve becomes at any given point- the less elastic supply or demand is Perfectly inelastic quantity does not respond at all to the changes in price Curves that are vertical Perfectly elastic Quantity responds enormously to changes in price (sensitive) Horizontal curves are elastic Unit elastic percentage change in quantity equals the percentage change in price 5 terms to describe elasticity Perfectly elastic Quantity responds enormously to changes in price (E=) Elastic % change in quantity exceeds the % change in price (E>1) Unit elastic % change in quantity is the same as the percentage change in price (E=1) Inelastic E <1 Perfectly inelastic E=0 Substitution & Elasticity Most important determinant of price elasticity of demanded is the number of substitutes for the good The more substitutions a good has, the more elastic demand is its demand Example Subsisting a big mac for a whooper Substitution & Demand The number of substitutes a good has is affected by several factors 1. The time period being considered 2. The degree to which a good is a luxury 3. The market definition The importance of the good in one’s budget How Substitution Factors Affect Specific Decisions In the long run, demand generally becomes more elastic Elasticity, Total Revenue, and Demand The total revenue a supplier receives is the price they charge times the quantity they sell Elasticity tells sellers what will happen to total revenue if their price changes If demand is elastic - a rise in price lowers total revenue If demand is unit elastic - a rise in price leaves total revenue unchanged If demand is inelastic - a rise in price increases total revenue Total Revenue along a Demand Curve With elastic demands, a rise in price decreases total revenue With inelastic demands, a rise in price increases total revenue Income and Cross-Price Elasticity Income elasticity of demand Tells us the responsiveness of demand to changes in income Normal goods Goods whose consumption increases with an increase in income Income elasticity of demand shows the responsiveness of demand to changes in income Luxury A good that has income elasticity greater than 1 Its percentage increase in demand is greater than the percentage increase in income Necessity A good that has an income in elasticity between 0 &1 The consumption of a necessity rises by a smaller proportion than the rise in income Inferior goods Goods whose consumption decreases when income increases Cross-Price Elasticity of Demand Cross-price elasticity of demand Shows the responsiveness of demand to changes in prices of related goods Substitutes Goods that can be used in place of another When the price of a good goes up, the demand for the substitute goes up Substitutes have positive cross-price elasticities Complements Goods that are used in conjunction with other goods A fall in the price of a good will increase the demand for its complement Compliments have negative cross-price elasticities Some Examples Elasticity and Shifting Supply and Demand

The Silk Road was a network of trade routes from the Han Dynasty, linking the East and West, primarily named for silk but also facilitating trade of spices, tea, porcelain, and precious metals.