Download ELASTICITY

ELASTICITY
By Frank Sigismondo, Nick Ryan, Sam Weiss, Brian Senkus, and Spencer Mann
VOCABULARY
Price elasticity of demand- the responsiveness (or sensitivity) of consumers to a price
change
Elastic- a specific percentage change in price results in a larger percentage change in
quantity demanded
Inelastic- a specific percentage change in price results in a smaller percentage change in
quantity demanded
Unit elasticity- Ed is 1
Perfectly inelastic- no change in quantity demanded
Perfectly elastic- elasticity coefficient is infinite
VOCABULARY
Total Revenue (TR)- the total amount the seller receives from the scale of a product in a particular time
period
Total-revenue test- if total revenue changes in opposite direction of price it's elastic, same direction is
inelastic, and no change is unit elastic
Immediate market period- the length of time over which producers are unable to respond to a change in
price with a change in quantity supplied
Short run- a period of time too short to change plant capacity but long enough to use the fixed-sized plant
more or less extensively
Long run- a time period long enough for firms to adjust their plant sizes and for new firms to enter (or
existing firms to leave) the industry
Income elasticity of demand- the degree to which consumers respond to a change in their incomes by buying
more or less of a particular good
PRICE ELASTICITY OF DEMAND
When the price of a good falls, the quantity demanded for that
good rises
The more drastic the change, the more elastic the curve will be
INELASTIC
DEMAND
PERFECTLY
INELASTIC
DEMAND
ELASTIC
DEMAND
PERFECTLY
ELASTIC
DEMAND
DETERMINANTS OF ELASTICITY
Number of Good Substitutes
Proportion of Income Time
Luxuries vs. Necessities
PRICE ELASTICITY ALONG THE
DEMAND CURVE
PRICE ELASTICITY OF SUPPLY
If the quantity supplied by producers is relatively responsive to
price changes, supply is elastic.
If it's relatively insensitive to price changes, supply is inelastic.
The easier and more rapidly producers can shift resources
between alternative uses, the greater the price elasticity of supply.
Formula is percentage change in quantity supplied of product X
divided by percentage change in price if product X
TRADITIONAL METHOD CALCULATION
Elasticity of Demand=(% change in quantity demanded)/(% change in price)
Elasticity of Supply=(% change in quantity supplied)/(% change in price)
When elasticity is greater than 1, the demand/supply is price elastic
When elasticity is less than 1, the demand/supply is price inelastic When elasticity equals 1, the demand/supply is unit elastic
EXAMPLE
The prices of carrots increase by 10%, and there is a 20 percent
decrease in quantity demanded
Ed=(-20%)/(10%)=-2
Although the answer is -2, the (-) sign is dropped, therefore
making Ed=2
Since the answer is greater than 1, the demand is price elastic
MIDPOINT METHOD
Elasticity of demand=(change in quantity demanded/average
demand)/(change in price/average price)
This method helps to avoid possible confusion associated with the
traditional method
CROSS PRICE ELASTICITY
Cross-Price Elasticity=(% change in quantity demanded of good A)/
(% change in price of good B)
If elasticity is positive, the goods are substitutes
If elasticity is negative, the goods are complements
If elasticity is close to 0, the goods are not affected by each other
TOTAL REVENUE TEST
A product is elastic when an increase of price
causes a decrease in total revenue
A product is inelastic when an increase in price
causes an increase in total revenue
A product is unit elastic when an increase in
price cause no change in total revenue
EX: GameStop increases the price of Corey in
the House for the Nintendo DS and the total
revenue for the game increases. Cory in the
House is inelastic.
POP QUIZ!!
Complete the quiz handout provided
Answer this FRQ:
Draw a perfectly inelastic curve. Be sure to label the graph where
needed. Also, name a situation in which there could be a perfectly
inelastic demand.