Elasticity

Constant unitary elasticity

in either a supply or demand curve, occurs when a price change of one percent results in a quantity change of one percent.

Unitary elasticities

indicate proportional responsiveness of either demand or supply if % change in quantity = % change in price, then % then change in quantity/ % change in price = 1

Zero elasticity or perfect inelasticity

refers to the extreme case in which a percentage change in price, no matter how large, results in zero change in quantity. While a perfectly inelastic supply is an extreme example, goods with limited supply of inputs are likely to feature highly inelastic supply curves. Examples include diamond rings or housing in prime locations such as apartments facing Central Park in New York City. Similarly, Chapter 5 | Elasticity 113 while perfectly inelastic demand is an extreme case, necessities with no close substitutes are likely to have highly inelastic demand curves. This is the case of life-saving drugs and gasoline.

elastic demand/supply

the elasticity is greater than one, indicating a high responsiveness to changes in price if % change in quantity > % change in price, then then % change in quantity / % change in price > 1

price elasticity of supply

the percentage change in quantity supplied divided by the percentage change in price

price elasticity of demand

the percentage change in the quantity demanded of a good or service divided by the percentage change in the price Price elasticities of demand are always negative since price and quantity demanded always move in opposite directions (on the demand curve)

Price elasticity

the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price.

inelastic demand/supply

Elasticities that are less than one indicate low responsiveness to price changes if % change in quantity < % change in price, then % change in quantity/ % change in price < 1

Infinite elasticity or perfect elasticity

The extreme case where either the quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all. In both cases, the supply and the demand curve are horizontal While perfectly elastic supply curves are for the most part unrealistic, goods with readily available inputs and whose production can easily expand will feature highly elastic supply curves. Examples include pizza, bread, books, and pencils. Similarly, perfectly elastic demand is an extreme example. However, luxury goods, items that take a large share of individuals' income, and goods with many substitutes are likely to have highly elastic demand curves. Examples of such goods are Caribbean cruises and sports vehicles.

Midpoint Method for Elasticity

To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price The advantage of the Midpoint Method is that one obtains the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base (average quantity and average price) for both cases.

Elasticity

an economics concept that measures the responsiveness of one variable to changes in another variable. When a firm considers raising the sales price, it must consider how much a price increase will reduce the quantity demanded of what it sells. Conversely, when a firm puts its products on sale, it must expect (or hope) that the lower price will lead to a significantly higher quantity demanded.