elasticity

• elasticity is used to measure consumer responsiveness to changes in price, income, & other factors affecting demand
• elasticity = % change in quantity demanded /  % change in factor examined
• price elasticity of demand

  = % change in quantity /% change in price
• PED

  always negative

  between 0 & 1, demand is inelastic

  = 1, demand is unit elastic

  above 1, demand is elastic

  all demand curves will have an elastic a inelastic portion separated by point of unit elasticity
• availability of a close substitute

  • if consumers can easily switch to another good, they will be more price sensitive

   (larger price elasticity of demand)

  • if consumers cannot easily switch to another good, they will be less price sensitive

  (lower price elasticity of demand)
• passage of time

  • it takes time for consumers to adapt to changes in prices
  • over time, demand becomes more elastic with respect to price
• luxuries vs necessities

  • consumers are usually more elastic with luxury goods compared to necessity goods
• market

  • fewer substitutes, demand is less elastic
  • more substitutes, demand is more elastic
• consumer's budget

  • if money spent on good is a lot of money, demand is more elastic
• perfectly inelastic demand

  = 0

  consumer will pay any price
• perfectly elastic demand

  = infinite

  consumers will buy any quantity firms can produce at or below current market price but will never pay more than the set price
• the income elasticity of demand could be positive or negative,

  depending on whether consumers buy more or less of the good as

  income increases
• if the income elasticity > 0 then as I increases, Q also increases

  • when an increase in income generates an increase in quantity

  consumed, the good is called a normal good
• if the income elasticity > 1

  • an increase in income generates a large increase in quantity

  consumed so the good is called a luxury good; conversely, a

  decrease in income generates a large decrease in quantity

  consumed
• if the 0 ≤  income elasticity  ≤ 1

  • an increase in income generates a small increase in quantity

  consumed so the good is called a necessity good; conversely, a

  decrease in income generates only a small decrease in quantity

  consumed
• if the income elasticity < 0

  • increase in income causes the quantity consumed to fall, so the good is called an inferior good; conversely, a decrease in income causes quantity consumed to rise
• the cross-price elasticity of demand tells us how responsive consumer demand for one product is to changes in the price of another product
• cross price elasticity of demand

  = % change in quantity of Good A /% change in price of Good B

   

  if cross price elasticity > 0, goods are substitutes

   

  if cross-price elasticity < 0, goods are complements

   

  if cross-price elasticity = 0, no relationship between goods
• the Price Elasticity of Supply measures how responsive producers

  are to a change in price

   

  = % change in quantity /% change in price

   

  always positive
• between 0 & 1, demand is inelastic

   

  = 1, demand is unit elastic

   

  above 1, demand is elastic

   

  all supply curves will have an elastic a inelastic portion separated by point of unit elasticity
• availability of inputs

  • if inputs are easy to obtain, firms can easily increase production in response to price increases, supply is more elastic
  • supply is less elastic if inputs are difficult to obtain

   

  passage of time

  • less time, less elastic short term, hard to hire workers and source new materials
  • more time, more elastic, there is time to hire workers and find substitutes for materials
• The more narrowly a market is defined, the more elastic demand will be because there are more available substitutes