Micro - Elasticities

What Is the Cross Price Elasticity of Demand?

= (% change in Qd of a good)/ (% change in the price of one of its substitutes or complements)

Time

longer time = higher elasticity shorter time = lower elasticity

What Is the Price Elasticity of Supply?

(% change in Q supplied)/ (% change in price)

Perfectly Elastic Demand

A perfectly elastic demand curve is horizontal (or almost so).

Perfectly Inelastic Demand

A perfectly inelastic demand curve is vertical. when the price rises, the quantity demanded does not change there is no change in the quantity demanded when price changes. Therefore, demand is perfectly inelastic

Why Do Economists Use Elasticity to Measure the Size of the Change?

Because elasticity is a ratio of two percentages, the percentages "cancel out" so that elasticity is a pure number, a number with no units of measurement attached to it.

What Does It Mean If the Elasticity Coefficient Is Infinite?

Demand is perfectly elastic.

What Does It Mean When the Elasticity Coefficient Is Equal to 0?

Demand is perfectly inelastic. The percentage change in quantity demanded is zero when the price changes. Consumers are completely insensitive or unresponsive to the price change. They want the same quantity no matter what the price is.

What Does an Elasticity Coefficient Equal to 1 in Absolute Value Mean?

Demand is unit elastic. The percent change in quantity demanded equals the percent change in price Consumers are neither very sensitive or responsive to price changes nor are they very insensitive or unresponsive.

What Is the Income Elasticity of Demand?

(% change in Qd/ % change in income) Positive income elasticity = normal good Negative income elasticity = inferior god

How Is the Price Elasticity of Demand Calculated?

((New Q - Initial Q)/((New Q + Initial Q) /2)) x 100

What Causes the Supply of Some Goods To Be More Elastic or More Inelastic than Others?

- Substitution effects - Time: Same effect as elasticity of demand

What Does an Elasticity Coefficient Greater than 1 in Absolute Value Mean?

Demand is elastic. The percent change in quantity demanded is greater than the percent change in price Consumers are relatively sensitive or responsive to price changes.

What Does an Elasticity Coefficient Smaller than 1 in Absolute Value Mean?

Demand is inelastic. The percent change in quantity demanded is smaller than the percent change in price Consumers are relatively insensitive or not very responsive to price changes.

Price Elasticity of Demand

Elasticity = %ΔQD/%ΔP

Elastic demand

If demand is elastic, a price change results in a change in total revenue (or total expenditure) in the opposite direction. P increase = TR decrease P decrease = TR increase

Inelastic demand

If demand is inelastic, a price change results in a change in total revenue (or total expenditure) in the same direction. P increase = TR increase P decrease = TR decrease

Unit elastic demand

If demand is unit elastic, a price change results in no change in total revenue (or total expenditure). P increase = TR unchanged P decrease = TR unchanged

What Is the Price Elasticity of Demand Used For?

It measures the size of the change in quantity demanded when the price of a good changes.

Substitution effects

More or better substitutes = Higher elasticity Few or poorer substitutes = Lower elasticity

Substitution effects (supply)

More or better substitutes = Higher elasticity Few or poorer substitutes = lower elasticity

What Causes the Demand for Some Goods To Be More Elastic or More Inelastic than Others?

Substitution effects Income effects Time

What Does the Elasticity Number or Coefficient Mean?

The absolute value of the elasticity coefficient shows whether the quantity change is bigger than the price change, the same size as the price change, or smaller than the price change.

Substitues and Complements

The cross price elasticity of demand between substitutes is positive. The cross price elasticity of demand between complements is negative.

Relationship between price elasticity of demand and total revenue

is valid for the price elasticity of demand only. It is not valid for any other elasticity (that is, income elasticity of demand, price elasticity of supply, or cross-elasticities).

Income Effects

larger share of income = higher elasticity smaller share of income = lower elasticity