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CAS w Business Elasticity Elasticity is a measure of how susceptible the quantity demanded of a good or service is to a price change. η >1 Curve elastic η= % change in Q % change in P η<1 Curve inelastic η=1 Curve unitary Reading Graphs for Elasticity of Demand • A vertical demand curve indicates that the good or service is perfectly inelastic – varying the price will not affect the quantity demanded at all. • A horizontal curve indicates the good or service is perfectly elastic – even the slightest change in price will make the good or service undesirable. • A flatter curve means that the good or service in question is elastic while inelastic demand is represented by a much more upright curve. Factors affecting demand elasticity: • Availability of substitutes is probably the most important factor; the more substitutes the more elastic the demand • Amount of income available to spend on the good • Time CAS w Business Elasticity of Supply • Elasticity of supply works similarly to that of demand. If a change in price results in a large change in quantity supplied then the supply appears flatter and is considered elastic. On the other hand if a big change in price results in only a minor change in quantity supplied the curve would be steeper and be inelasticity. Income Elasticity of Demand • This is the degree to which an increase in income will cause an increase in demand. EDy = • If EDy is greater than one, demand for the item is considered to have a high income elasticity. If EDy is less than one, demand is considred to be income inelastic. Luxury items usually have a higher income elasticity. Cross-Price Elasticity • This is a measure the responsiveness of the demand for a good to a change in price of another good. If η is positive, then the goods are substitutes - one can replace the other. % change in QD of x ηxy = % change in P of y If η is negative, the goods are complements - they “go together”