3.2

• Elasticity defintion

  The proportionate responsiveness of a second variable to an initial change in the first variable
• price elasticity of demand definition

  a measure of the percentage or proportionate change/increase/decrease in the quantity demanded resulting from a given percentage or proportionate change/increase/decrease in the price of that good
• what do different PED values mean?

  • PED > 1 = elastic (luxuries, many substitutes)
  • PED < 1 = inelastic (necessities, few substitutes)
  • PED = 1 = unitary elasticity
  • PED = 0 = perfectly inelastic
  • PED = ∞ = perfectly elastic
• What factors influence PED?

  • number and closeness of substitutes
  • Necessity vs luxury
  • Proportion of income spent
  • Time (longer = more elastic)
  • Habitual consumption
  • Brand loyalty
• short run definition

  the time period in which at least one factor of production is fixed and cannot be varied
• long run definition

  the time period in which no factors of production are fixed and all the factors of production can be varied
• price elastic of demand (PED) formula

  $\frac{\%\ change\ in\ quantiy\ demanded}{\%\ change\ in\ price}$
• income elasticity of demand (YED) definition

  measure of the proportionate change in quantity demanded resulting from a given proportionate change in income
• income elasticity of demand formula

  $\frac{\%\ change\ in\ quantity\ demanded}{\%\ change\ in\ income}$
• what do different YED values mean?

  • YED > 1 = luxury good (income elastic)
  • YED between 0 and 1 = normal good (income inelastic)
  • YED < 0 = inferior good
• cross elasticity of demand (XED) definition

  the proportionate change in quantity demanded of a good resulting from a given proportionate change in the price of another good
• cross elasticity of demand formula

  $\frac{\%\ change\ in\ quantity\ demanded\ of\ good\ A}{\%\ change\ in\ price\ of\ good\ B}$
• what do different XED values mean?

  • XED > 0 = substitutes (e.g coke and pepsi)
  • XED < 0 = complements (e.g iphone and airpods)
  • XED = 0 = unrelated goods (independent)
• why is elasticity important for firms?

  • helps predict how a price change will affect total revenue
  • influences pricing strategies
  • helps segment markets
  • supports decisions on product development and marketing
• Whats the relationship between PED and total revenue?

  • elastic demand: increase in price = decrease in total revenue
  • Inelastic demand: increase in price = increase in total revenue
  • Unitary demand: price change has no effect on total revenue
• what types of goods have high YED?

  • designer clothing
  • high end cosmetics
  • travel and leisure
• perfectly elastic definition

  when price elasticity is infinite, meaning demand changes substantially even with minimal price change
• perfectly inelastic definition

  reduction in price does nor increase demand nor increase in price does not reduce demand
• unitary elastic definiton

  price change leads to an equal percentage change in demand