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ECON

Elasticity measures the responsiveness of quantity demanded or supplied to changes in various factors like price and income. Price elasticity of demand indicates how much quantity demanded responds to a price change, with inelastic demand leading to higher total revenue from a price increase. Income elasticity measures the responsiveness of quantity demanded to changes in consumer income. Cross-price elasticity measures how quantity demanded of one good responds to price changes in another good. Price elasticity of supply indicates how quantity supplied responds to price changes, affecting the shape of the supply curve.

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35 views1 page

ECON

Elasticity measures the responsiveness of quantity demanded or supplied to changes in various factors like price and income. Price elasticity of demand indicates how much quantity demanded responds to a price change, with inelastic demand leading to higher total revenue from a price increase. Income elasticity measures the responsiveness of quantity demanded to changes in consumer income. Cross-price elasticity measures how quantity demanded of one good responds to price changes in another good. Price elasticity of supply indicates how quantity supplied responds to price changes, affecting the shape of the supply curve.

Uploaded by

Niña Ricci Gacayan Naceno
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ELASTICITY measures market responsiveness  A steeper demand curve indicates

to changes in various factors. smaller price elasticity of demand.

The Elasticity of Demand


Effect of Price Changes on Total Revenue:
1. Price Elasticity of Demand: measure of how
much the quantity demanded responds to a change  Inelastic demand: Price increase leads to an
in price. increase in total revenue.
 Elastic demand: Price increase leads to a
Determinants of Price Elasticity of Demand decrease in total revenue.
1. Availability of Close Substitute
2. Necessities versus Luxuries  Unit elastic demand: Total revenue remains
3. Definition of the Market constant when the price changes.
4. Time Horizon
2. Income Elasticity of Demand: measures how
Formula:
quantity demanded changes as consumer income
Price Elasticity of Demand = (Percentage changes.
Change in Quantity Demanded) / (Percentage
Change in Price)
Formula:
Elastic vs. Inelastic Demand: Describes how Income Elasticity of Demand = (Percentage
responsive quantity demanded is to price changes. Change in Quantity Demanded) / (Percentage
Change in Income)
 The Midpoint Method:
3. Cross-Price Elasticity of Demand: measures
- Instead of dividing by the initial level, the how the quantity demanded of one good responds
midpoint method calculates percentage changes to a change in the price of another good.
by dividing the change by the midpoint (average)
of the initial and final levels.
Formula:
- Formula for Percentage Change Using
Midpoint Method: (Percentage Change in Quantity Demanded of
Good 1) / (Percentage Change in the Price of
[(Change / Midpoint) x 100] Good 2)

The formula for calculating price elasticity The Elasticity of Supply


using the midpoint method:
Price Elasticity of Supply: measures how
the quantity supplied responds to changes
Price Elasticity of Demand = [(ΔQ / [(Q₁ + Q ₂) /
in price.
2]) / (ΔP / [(P₁ + P₂) / 2])]

Elasticity Classification: Formula:


1. Demand is elastic (elasticity > 1) Price Elasticity of Supply Formula: (Percentage
2. Demand is inelastic (elasticity < 1) Change in Quantity Supplied) / (Percentage
3. Unit elasticity (elasticity = 1) Change in Price)

Total Revenue Formula: Variety of Supply Curves


Total Revenue = Price (P) × Quantity (Q) 1. Price elasticity of supply affects the
appearance of the supply curve.
2. Panel (a): Perfectly inelastic supply
The Relationship Between Elasticity and the
(vertical supply curve).
Demand Curve: 3. Panel (e): Perfectly elastic supply
 A flatter demand curve indicates greater (horizontal supply curve).
price elasticity of demand.

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