Microeconomics

• Elasticity


  The degree to which a demand or supply is sensitive to changes in price or income
• Elastic


  Consumers are sensitive to price changes
• Inelastic


  Consumers are insensitive to price changes
• Price Elasticity of Demand

  A measure of the responsiveness of quantity demanded to changes in price

  
• Percentage Change in Quantity Demanded

  |%ΔQd| = ((Q2-Q1)/Q1)*100

  
• Percentage Change in Price

  |%ΔP| = ((P2-P1)/P1)*100

  
• Types of Demand Elasticity

  • Elastic
  • Inelastic
  • Unit Elastic
  • Perfectly Elastic
  • Perfectly Inelastic
• Elastic Demand


  • Percentage change in quantity demanded is greater than the percentage change in price
  • |e|>1

  
• Inelastic Demand


  • Percentage change in quantity demanded is less than the percentage change in price
  • |e|<1

  
• Unit Elastic Demand


  • Percentage change in quantity demanded is equal to the percentage change in price
  • |e|=1

  
• Perfectly Elastic Demand


  • Quantity demanded changes by a very large percentage in response to an almost zero percentage change in price
  • |e| = infinity

  
• Perfectly Inelastic Demand


  • Percentage change in the quantity demanded is zero for any percentage change in the price
  • |e| = 0

  
• Determinants of Price Elasticity of Demand

  • Number of Substitutes
  • Narrowness of Definition
  • Necessities vs Luxuries
  • Percentage of One's Budget Spent on the Good
  • Time

  
• Price Elasticity of Supply


  Refers to the reaction or response of the sellers or producers to price changes of goods sold
• Percentage Change in Quantity Supplied

  |%ΔQs| = ((Q2-Q1)/Q1)*100

  
• Types of Supply Elasticity

  • Elastic
  • Inelastic
  • Unit Elastic
  • Perfectly Elastic
  • Perfectly Inelastic
• Elastic Supply


  • Percentage change in quantity supplied is greater than the percentage change in price
  • Es > 1

  
• Inelastic Supply


  • Percentage change in quantity supplied is less than the percentage change in price
  • Es < 1

  
• Unit Elastic Supply


  • Percentage change in quantity supplied is equal to the percentage change in price
  • Es = 1

  
• Perfectly Elastic Supply


  • Small change in price changes the quantity supplied by an infinitely large amount
  • Es = ∞

  
• Perfectly Inelastic Supply


  • Change in price brings no change in quantity supplied
  • Es = 0

  
• Factors Affecting Elasticity of Supply


  • Raw Materials
  • Production Costs
  • Type of Goods
  • Geographical Factors
  • Time Factor
  • Factor of Production and Mobility
  • Type of Production Cycle
  • Production Scale