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Elasticity Formula Sheet Elasticity of Demand (ED): We know by the Law of Demand that when P increases, the quantity demanded falls. We want to know by how much quantity demanded falls. Is it a small decrease or a large drop? This is why we need ED. ED Q1 Q0 Q Q1 %Q 0 P1 P0 %P P0 P1 o ED > 1 o ED < 1 o ED = 1 %ΔQ > %ΔP %ΔQ < %ΔP %ΔQ = %ΔP Demand is ELASTIC Demand is INELASTIC Demand is UNITARY ELASTIC Elasticity of Supply (ES): We know by the Law of Supply that when P increases, the quantity supplied increases. We want to know by how much quantity supplied rises. Is it a small increase or a large increase? This is why we need ES. Q1 Q0 Q Q1 %Q ES 0 P1 P0 %P P0 P1 o ES > 1 o ES < 1 o ES = 1 %ΔQ > %ΔP %ΔQ < %ΔP %ΔQ = %ΔP Supply is ELASTIC Supply is INELASTIC Supply is UNITARY ELASTIC Income Elasticity (EI): The best way to think about this is to ask yourself the following questions: What happens to my demand for good “x” when my income rises? What happens to my demand for good “x” when my income falls? Q1 Q0 Q0 Q1 % Q EI I1 I 0 % I I 0 I1 o EI < 0 as I rises, D for “X” falls, so “X” is an INFERIOR good o 0 < EI < 1 as I rises, D for “X” rises by a small amount, so “X” is a NECESSITY (NORMAL) good o EI > 1 as I rises, D for “X” rises by a lot, so “X” is a LUXURY (NORMAL) good Cross-Price Elasticity of Demand (XD): This relates the quantity demanded of one good (“X”) to the price of a related good (“Y”). o XD > 0 PY , Q X , so good “X” and the related good “Y” are Q1 Q0 SUBSTITUTES in consumption Q0 Q1 %QXD XD o XD < 0 PY , QX , so good “X” and the related good “Y” are P1 P0 %Prelated COMPLEMENTS in consumption good ,Y P0 P1 o XD = 0 there is no relationship between the 2 goods Cross-Price Elasticity of Supply (XS): This relates the quantity supplied of one good (good “X”) to the price of a related good (good “Y”). XS Q1 Q0 % Q XS P1 % Prelated goodY P0 Q0 Q1 P0 P1 o XS > 0 PY , QX , so good “X” and the related good “Y” are COMPLEMENTS in production o XS < 0 PY , QX , so good “X” and the related good “Y” are ALTERNATIVES in production o XS = 0 there is no relationship between the 2 goods *NOTE: You can compare XD and XS to 1 to see whether it is elastic, inelastic, or unitary elastic.