Download Elasticity of Demand and Supply: A Summary 1. Price (own

Elasticity of Demand and Supply: A Summary
1.
Price (own-price) elasticity of demand:
Concept:
Quantity response of buyers to changes in price.
%∆Qd
Ed = ───────
%∆P
(1)
Elastic demand: Buyers are responsive to price changes.
%∆Qd > %∆P → Ed > 1
Curve toward horizontal.
Examples: (1) Goods that buyers perceive as being luxuries (as
opposed to necessities).
(2) Goods that command high prices (relative to the size of
the family budget).
(3) Goods for which there are readily available
substitutes.
Total revenue (TR) and expenditure (TE) test: TR(TE) = f (P)[-]
(2)
Inelastic demand: Buyers are unresponsive to price changes.
%∆Qd < %∆P → Ed < 1
Curve toward vertical.
Examples: (1) Goods that buyers perceive as being necessities (as
opposed to luxuries).
(2) Goods that command low prices (relative to the size of
the family budget).
(3) Goods for which there are no readily available
substitutes.
Total revenue (TR) and expenditure (TE) test: TR(TE) = f (P)[+]
(3)
Unit elastic demand: Buyers are proportionately responsive to
price changes.
%∆Qd = %∆P → Ed = 1
Curve a rectangular hyperbola.
Total revenue (TR) and expenditure (TE) test: TR(TE) are constant
with respect to changes in P.
Coefficient calculation (arc formula):
Q 1 - Q2
───────────
Q1 + Q2 / 2
Ed = ─────────────
P 1 - P2
───────────
P1 + P2 / 2
Q1 - Q2
───────
Q 1 + Q2
=
─────────
P1 - P2
───────
P 1 + P2
where: Q1 = original quantity; Q2 = subsequent quantity;
P1 = original price; P2 = subsequent price.
-1-
-22.
Income elasticity of demand:
Concept:
Quantity response of buyers to changes in income.
%∆Qd
EY = ───────
%∆Y
Coefficient calculation:
Q1 - Q2
───────
Q1 + Q2
EY = ─────────
Y1 - Y2
───────
Y1 + Y2
where: Q1 = original quantity; Q2 = subsequent quantity;
Y1 = original income; Y2 = subsequent income.
Sign is meaningful in the case of EY:
(1) If EY > 0 (+) → the good is a normal good.
(2) If EY < 0 (-) → the good is an inferior good.
-33.
Cross-price elasticity of demand:
Concept:
Quantity response of buyers for one good (good X) to changes in
the price of another good (good Y).
%∆QX
EXY = ───────
%∆PY
Coefficient calculation:
QX1 - QX2
─────────
QX1 + QX2
EXY = ───────────
PY1 - PY2
─────────
PY1 + PY2
where: QX1 = original quantity of X; QX2 = subsequent quantity of X;
PY1 = original price of Y; PY2 = subsequent price of good Y.
Sign is meaningful in the case of EXY:
(1) If EXY > 0 (+) → goods X and Y are substitutes.
(2) If EXY < 0 (-) → goods X and Y are complements.
-44.
Price elasticity of supply:
Concept:
Quantity response of sellers to changes in price.
%∆Qs
Es = ──────
%∆P
(1)
Elastic supply: Sellers are responsive to price changes.
%∆Qs > %∆P → Es > 1
Curve toward horizontal, positive vertical intercept.
(2)
Inelastic supply: Sellers are unresponsive to price changes.
%∆Qs < %∆P → Es < 1
Curve toward vertical, negative vertical intercept.
(3)
Unit elastic supply: Sellers are proportionately responsive to
price changes.
%∆Qs = %∆P → Es = 1
Curve is linear, passes through the origin.
Coefficient calculation (arc formula):
Q 1 - Q2
───────────
Q1 + Q2 / 2
Es = ─────────────
P 1 - P2
───────────
P1 + P2 / 2
Q1 - Q2
───────
Q 1 + Q2
=
─────────
P1 - P2
───────
P 1 + P2
where: Q1 = original quantity; Q2 = subsequent quantity;
P1 = original price; P2 = subsequent price.