Elasticity
the responsiveness of one economic variable to another variable
What is the equation for elasticity?
(% change in A)/(% change in B)
Elasticity of Demand?
(% change in Qd)/(% change in P) [OR (change in Q/average quantity)/(change in P/average price)]
What is an elastic magnitude?
greater than one
What is an inelastic magnitude?
less than one
Perfectly inelastic curves are...
vertical (0)
Perfectly elastic curves are...
horizontal (1)
Cross-price elasticity compares...
% change in quantity demanded of good A to % change in price of good B
What are the exceptions for durable/storable goods?
1. elasticity of income
2. elasticity of cross-price
Revenue =
(price charge) x (quantity demanded)
What are the determinants of the elasticity of demand?
1. availability of substitutes (better substitutes causes elasticity to increase)
2. proportion of income spent on the good
3. amount of time elapsed
Total Revenue Test
method of measuring elasticity by comparing the change in total revenues
Income elasticity of demand
measure of the responsiveness of the demand for a good or service to a change in income
What is the income of elasticity of demand formula?
(% change in quantity demanded)/(% change in income)
If an income elasticity of demand is positive and greater than 1...
it is a normal good with elastic income
If an income elasticity of demand is positive and less than 1...
it is a normal good with inelastic income
If an income elasticity of demand is negative...
it is an inferior good
Cross elasticity of demand
measure of responsiveness of the demand for a good to a change in the price of a substitute or complement
What is the cross elasticity of demand formula?
(% change in quantity demanded)/(% change in price of a substitute or complement)
If the cross elasticity of demand is positive...
the price of the other good changes in the same direction, so the goods are substitutes
If the cross elasticity of demand is negative...
the price of the other good changes in the opposite direction, so the goods are complements
Elasticity of supply
measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same