Chapter 4 - Elasticity
Price elasticity of demand
- Price elasticity of demand: percentage change in the quantity demanded of a good/service that results from a 1 percent change in its price. * For example, if the price of beef falls by 1 percent and the quantity demanded rises by 2 percent, then the price elasticity of demand for beef has a value of -2.
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- The demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1.
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- The demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1 unit.
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- The demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1.
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A graphical interpretation of price elasticity
- Perfectly elastic demand: demand is perfectly elastic with respect to price if price if elasticity of demand is infinite.
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- Perfectly inelastic demand: demand is perfectly inelastic with respect to price if price elasticity of demand is zero.
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Elasticity and total expenditure
- Total daily expenditure on a good: daily number of units bought times the price for which it sells. * Total expenditure = Total revenue: The dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive.
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Income elasticity and cross-price elasticity of demand
- Cross-price elasticity of demand: percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second.
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- Income elasticity of demand: percentage by which quantity demanded changes in response to a 1 percent change in income.
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Price elasticity of supply
- Price elasticity of supply: percentage change in quantity supplied that occurs in response to a 1 percent change in price.
- Perfectly inelastic supply: supply is perfectly inelastic with respect to price if elasticity is zero.
- Perfectly elastic supply: supply is perfectly elastic with respect to price if elasticity of supply is infinite.
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