Chapter 5 ElasticityElasticity is a measure of responsiveness (sensitivity) of the quantity demanded of a good to a change in some variable

What factors impact elasticity of demand?

- Availability of close substitutes - Complementary goods - Luxury vs necessary good - Proportion of income spend on a good - Durability (think of a price increase on an oven as an example) - Future expectations - Length of time allowed (cigarettes - short term vs long term) - Brand loyalty - Number of uses the good has

perfectly inelastic

0 percentage change in the price of a good causes no change in the quantity demanded of that good could only really happen for life changing medicines as an example

unitary elastic

1 percentage change in the quantity demanded of a good is equal to the percentage change in the price of that good

relatively inelastic

<1 percentage change in quantity demanded of a good is less than the percentage change in price of that good

relatively elastic

>1 percentage change in quantity demanded of a good is greater than the percentage change in the price of the good itself

perfectly elastic

infinity increase in the price of that good results in its quantity falling to zero Only applicable when there are perfect substitutes available

Elasticity

measure of responsiveness (sensitivity) of the quantity demanded of a good to a change in some variable

Income elasticity of demand (YED) answer: positive negative b/t 0-1 >1

measures the percentage change in the quantity demanded for a good caused by the percentage change in the income (Y) of consumers positive: normal good negative: inferior b/t 0-1: necessary >1: luxury You do NOT refer to elasticity here - only ever Inferior, normal or luxury

Price elasticity of demand (PED)

measures the percentage change in the quantity demanded for a good caused by the percentage change in the price of the good itself answer tells you what a 1% change in price does to demand. sign in the answer tells if you if product follows the Law of Demand - the minus sign tells you it does, once you have that, focus on the number - then determine if it is elastic or not!

How to maximise revenue?

If the good is elastic, decrease price. If the good is unitary elastic, keep price the same. If the good is inelastic, increase price