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Elasticity

The document describes how to calculate three types of elasticity - own-price elasticity, cross-price elasticity, and income elasticity - using equations and examples of prices, quantities, and incomes. It includes a section on how to measure elasticity of demand and the relationship between demand, price, quantity, and total revenue using a linear demand curve.

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Mike Wooddell
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168 views

Elasticity

The document describes how to calculate three types of elasticity - own-price elasticity, cross-price elasticity, and income elasticity - using equations and examples of prices, quantities, and incomes. It includes a section on how to measure elasticity of demand and the relationship between demand, price, quantity, and total revenue using a linear demand curve.

Uploaded by

Mike Wooddell
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Measuring Elasticity: Own-price, Cross-price, Income

Created by Rick L. Hirschi For demonstration purposes only


Only change the red numbers
Enter in the prices/incomes and quantities and the program will compute the elasticity

Own-Price Elasticity: |The absolute value|


Equation: ((Q2-Q1)/((Q2+Q1)/2))/((P2-P1)/((P2+P1)/2))
P1 -3.00 Q1 0.000
P2 0.00 Q2 0.000
Results: If |Ed| > 1, elastic
| #DIV/0! | If |Ed| = 1, unit elastic
#DIV/0! If |Ed| < 1, inelastic
#DIV/0!

Cross-Price Elasticity:
Equation: ((Qx2-Qx1)/((Qx2+Qx1)/2))/((Py2-Py1)/((Py2+Py1)/2))
Py1 8.00 Qx1 2.000
Py2 7.00 Qx2 3.000
Results: If Exy > 0, substitute goods
-3.000 If Exy = 0, unrelated goods
Complement If Exy < 0, complement goods
An increase in the price of one good decreases the quantity demanded of the other good
Example: Steak and Steak Sauce

Income Elasticity:
Equation: ((Q2-Q1)/((Q2+Q1)/2))/((I2-I1)/((I2+I1)/2))
Income1 $28,000.00 Q1 50.00
Income2 $30,000.00 Q2 52.00
Results: If EI > 0, Normal good
0.569 If EI < 0, Inferior good
Normal
An increase in income increases the quantity demanded of the good
ce, Income

mpute the elasticity

ded of the other good


Elasticity of Demand and Total Revenue
Created by Rick L. Hirschi For demonstration purposes only
Designed to demonstrate the relationship between demand and total revenue.

Enter in numbers for the intercept and slope. Recall the slope of a demand curve is negative
Note: worksheet divides the demand curve into 10 intervals. Intersects the Q-axis: 10

Linear Demand Curve


Demand & Total Revenue
Intercept 10
Slope -1

Dollars ($)
30
Total Own Price 25
Price Quantity Revenue Elasticity
10 0 0 --- 20
9 1 9 19.000 Elastic 15
8 2 16 5.667 Elastic
7 3 21 3.000 Elastic 10
6 4 24 1.857 Elastic
5
5 5 25 1.222 Elastic
4 6 24 0.818 Inelastic 0
3 7 21 0.538 Inelastic 0 2 4 6 8 10 12
2 8 16 0.333 Inelastic Quantity
1 9 9 0.176 Inelastic
0 10 0 0.053 Inelastic Quantity Revenue
d curve is negative

Total Revenue

6 8 10 12
Quantity

ntity Revenue

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