Elasticity

• Elasticity


  A measure of how much buyers and sellers respond to changes in market conditions
• Price elasticity of demand


  A measure of how much the quantity demanded of a good responds to a change in the price of that good
• Calculating price elasticity of demand

  Find change in quantity demanded (6 - 8 = -2)

  2. Calculate percentage change in quantity demanded (-2/8 * 100 = -25%)

  3. Calculate percentage change in price ((12 - 10)/10 * 100 = 20%)

  4. Divide percentage change in quantity by percentage change in price (-25% / 20%) = -1.25
• Elasticity coefficient


  The number calculated using the price elasticity of demand formula
• The price elasticity of demand coefficient will always be negative
• Degrees of elasticity

  • Perfectly inelastic (coefficient = 0)

  Inelastic (coefficient < 1)

  Unitary elasticity (coefficient = 1)

  Elastic (coefficient > 1)

  Perfectly elastic (coefficient = infinity)
• Inelastic demand


  • Quantity demanded does not respond strongly to price changes

  Coefficient is less than 1
• Elastic demand


  • Quantity demanded responds strongly to price changes

  Coefficient is greater than 1
• As price falls


  Quantity demanded increases
• As price rises


  Quantity demanded decreases
• Inelastic demand


  Demand where the quantity demanded responds less than proportionately to a change in price
• Elastic demand


  Demand where the quantity demanded responds more than proportionately to a change in price
• Diabetes medicine has inelastic demand because consumers must buy a certain dosage regardless of price changes
• If price elasticity of demand is less than 1


  Demand is inelastic
• If price elasticity of demand is greater than 1


  Demand is elastic
• Perfectly inelastic demand is represented by a vertical demand curve
• Perfectly elastic demand is represented by a horizontal demand curve</b>
• Factors affecting price elasticity of demand

  • Price of the good
  • Availability of substitutes
  • Percentage of income spent on the good
  • Time for adjustment
  • Habit formation
  • Necessity of the good
  • Number of uses for the good
  • Definition of the good
• The higher the price of a good, the more elastic the demand
• The more substitutes available for a good, the more elastic the demand
• The higher the percentage of income spent on a good, the more elastic the demand
• The more time consumers have to adjust, the more elastic the demand
• Habit-forming goods tend to have inelastic demand
• The more necessary a good is, the more inelastic the demand
• The more uses a good has, the more elastic the demand
• The more narrowly defined a good is, the more elastic the demand
• Good


  The more narrowly defined a good is, the more elastic demand will be. The broader the definition, the more inelastic demand will be.
• Good


  • A specific brand of a good (e.g. a specific city brand) will have an elastic demand because as the price increases, consumers may switch to another brand. However, the demand for the good in general (e.g. the price of compact discs) will be more inelastic because there are fewer substitutes.
• An example of a narrowly defined good with elastic demand is a specific brand of a good, like a city brand. As the price increases, consumers may switch to another brand.
• An example of a broadly defined good with inelastic demand is the price of pens or pencils in general. If the price of pens goes up, consumers will still need to buy a pen, so demand remains more or less the same.
• Income elasticity of demand


  Measures the responsiveness of quantity demanded to a change in income. Formula: Percentage change in quantity demanded / Percentage change in income.
• Income elasticity of demand measures whether demand is responsive or not very responsive to changes in income.
• Positive income elasticity of demand indicates a normal good, where demand increases as income increases.
• Cross elasticity of demand


  Measures the responsiveness of quantity demanded for one good to a change in the price of another good. Formula: Percentage change in quantity of good X / Percentage change in price of good Y.
• Cross elasticity of demand

  • Substitute goods have a positive cross elasticity coefficient (as the price of one goes up, demand for the other increases). Complementary goods have a negative cross elasticity coefficient (as the price of one goes up, demand for the other decreases).
• Cross elasticity of demand measures how the quantity demanded of one good changes in response to a change in the price of another good.
• Price elasticity of supply


  Measures the responsiveness of quantity supplied to a change in the price of the good. Formula: Percentage change in quantity supplied / Percentage change in price.
• Price elasticity of supply


  • Ranges from perfectly inelastic (coefficient = 0) to perfectly elastic (coefficient = infinity). The degree of elasticity depends on factors like ability to adjust production.
• When the price of a good increases, the quantity supplied will increase (direct/positive relationship).