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 payanyprice
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 GoodA /% change in price of GoodB
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