Chapter 4: Elasticity
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Elasticity refers to the rate of change of quantity demanded or supplied with respect to changes in factors like price. There are different types of elasticity including price elasticity of demand, which measures responsiveness of quantity demanded to price changes, and price elasticity of supply, which measures responsiveness of quantity supplied to price changes. Elasticity can take on different values that indicate the degree or characteristics of responsiveness, such as perfectly inelastic, inelastic, unitary, or perfectly elastic. Factors like availability of substitutes and time period can impact price elasticity.
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Chapter 4: Elasticity
- 2. Elasticity is the rate of change of the quantity demanded or quantity supplied due to a change in a variable.
- 3. Demand
- 4. Price Elasticity of Demand measure of the responsiveness of the quantity demand for a good to a change in its price.
- 5. Degree of elasticity Characteristic Value of elasticity Demand curve shape Perfectly inelastic If the % of ∆ in Qd is not sensitive to the % of ∆ in price Ed = 0 Vertical Inelastic If the % of ∆ in Qd is bigger than the % of ∆ in price 0 < Ed < 1 Steep Unitary elastic If the % of ∆ in Qd is equivalent to the % of ∆ in price Ed = 1 Hyperbola Elastic If the % of ∆ in Qd is smaller than the % of ∆ in price 1 < Ed < ∞ Tilted Perfectly elastic If the % of ∆ in Qd is infinity to the % of ∆ in price Ed = ∞ Horizontal
- 6. Relationship between Price Elasticity of Demand & Total Revenue Degree of Elasticity Characteristics Change in TR Perfectly inelastic If P , the % change for Q is insensitive TR remains If P , the % change for Q is insensitive TR Inelastic If P , the % of for Q is smaller. TR If P , the % of Q is smaller. TR Unitary elastic If P , the % of for Q is similar TR remains If P , the % of Q is similar. Elastic If P , the % of for Q is more significant. TR If P , the % of Q is more significant. TR Perfectly elastic If P , the % of for Q is infinity. TR If P , the % of Q is null. TR = 0
- 7. Factors Affecting Price Elasticity of Demand Availability of Substitutes Proportion of Expenses from Income Number of Uses Importance Time Period Consumer Habit Branding
- 8. Income Elasticity Measures the responsiveness or sensitivity of changes in the quantity demanded for a product due to a change in income
- 9. Relationship between the value of income elasticity of demand and types of goods Value of income elasticity of demand (Ey) Types of goods Positive Normal goods • Ey = 1 • Superior • 0 < Ey < 1 • Essential • 1 < Ey < ∞ • Luxuries Negative Inferior goods Zero (Ey = 0) Necessity goods
- 10. Cross Elasticity Measures the responsiveness or sensitivity of quantity demanded for a product due to a change in the price of a related product
- 11. The relationship between two goods from the value of cross elasticity of demand Value of cross elasticity of demand (Exy) Relationship between two goods Negative Complementary goods Positive Substitute goods Zero Non-related goods
- 12. Supply
- 13. Price Elasticity of Supply Measures the sensitivity or responsiveness of the quantity supplied due to a change in the price of a product or service.
- 14. Elasticity of coefficient Terms Explanation Diagrams Ess > 1 Elastic A small percentage change in price will lead to a large percentage change in the quantity supplied Ess < 1 Inelastic A large percentage change in price will only affect a small percentage of the quantity supplied Ess = 1 Unitary elastic A percentage change in price equals the percentage change in the quantity supplied Ess = 0 Perfectly inelastic A percentage change in price has no effect on the percentage change in the quantity supplied Ess = ∞ Perfectly elastic An almost zero percentage change in price brings about a very large percentage change in the quantity supplied
- 15. Factors Affecting the Price Elasticity of Supply