econ

• Elasticity


  Measures how much one variable responds to changes in another variable
• Price elasticity of demand


  Responsiveness of consumers' demand to change in price of the good sold
• Income elasticity of demand

  Responsiveness of consumers' demand to a change in their income
• Cross price elasticity of demand

  Responsiveness of demand for a certain good, in relation to change in price of other related goods
• The Law of Demand tells us that we will buy more of a good or service if the price declines and less when price goes up
• Classification of Elasticity


  • Price elasticity of demand
  • Income elasticity of demand
  • Cross price elasticity of demand
• Price elasticity of demand


  Consumers' responsiveness to a change in price
• Slope


  ΔQ / ΔP
• Elasticity


  % ΔQ / % ΔP
• Inelastic demand


  • Demand curve is relatively steep
  • Consumers' price sensitivity is relatively low
  • Elasticity < 1
• Unit elastic demand


  • Demand curve has intermediate slope
  • Consumers' price sensitivity is intermediate
  • Elasticity = 1

  
• Elastic demand


  • Demand curve is relatively flat
  • Consumers' price sensitivity is relatively high
  • Elasticity > 1

  
• Perfectly inelastic demand


  • Demand curve is vertical
  • Consumers' price sensitivity is none
  • Elasticity = 0
• Perfectly elastic demand


  • Demand curve is horizontal
  • Consumers' price sensitivity is extreme
  • Elasticity = infinity

  
• Ranges for the values of Elasticity of Demand

  • Elastic (|E| > 1)
  • Unitary (|E| = 1)
  • Inelastic (|E| < 1)

  
• Factors affecting elasticity of demand

  • Number of substitutes or the substitution effect of price changes
  • Price in relation to budget
  • Location in the demand curve
  • Ranges of uses for the product
• Point Method or the Point Elasticity of Demand


  Measures the responsiveness of the quantity demanded of a good to a change in its price at a specific point on the demand curve
• Arc Elasticity of Demand


  Measures the responsiveness of quantity demanded to changes in price along a specific segment of the demand curve

  
• Demand elasticity and Total Revenue


  Total Revenue = Price * Quantity
• Income Elasticity of Demand

  Measures the degree to which consumers respond to a change in their incomes by purchasing more or less of a particular good
• Types of goods based on Income Elasticity

  • Inferior goods (negative income elasticity)
  • Normal goods (positive income elasticity, income inelastic (0 < E < 1), income elastic (E > 1))
• Cross Price Elasticity of Demand


  Measures the response of demand for one good to changes in the price of another good
• Relationship between Cross Price Elasticity and type of goods

  • Substitutes (positive cross price elasticity)
  • Complements (negative cross price elasticity)
  • Unrelated (cross price elasticity = 0)
• Price Elasticity of Supply


  Measures the degree of responsiveness of supply to a given change in price
• Types of Supply Curves based on Price Elasticity


  • Perfectly inelastic (elasticity = 0, vertical supply curve)
  • Inelastic (elasticity < 1)
  • Unit elastic (elasticity = 1)
  • Elastic (elasticity > 1)
  • Perfectly elastic (elasticity = infinity, horizontal supply curve)