Download Lecture_02.4 Elasticity

Elasticity: Demand &
Supply
How Responsive is Quantity
Demanded/Supplied to
Changes in Prices (or Income)
Types of Elasticities
• Generally 3 categories we are concerned about
• Price elasticity
• Own-price:
• How quantity demanded changes with the (own) price
• Cross-price
• How quantity demanded changes with another (cross) good’s price
changes
• Income elasticity
• How quantity demanded changes with a change in your income
• Supply elasticity
• How quantity supplied changes with a change in (own/market) price
Elasticity Measures
• 3 Major Types for Demand
• Own-price
• Measures the change in quantity demanded with a change in the
(own) good’s price
Always negative (F.L.O.D)
Always expressed in absolute value (as it’s always negative)
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•
• Cross-price
• Measures the change in quantity demanded with a change in the
price of a related good (e.g. complement or substitute)
• Complement (-) Substitute (+)
• Income
• Measures the change in quantity demanded with a change in income
• Normal/superiors goods (+) Inferior goods (-)
Demand Elasticity
• Economist use the (own) price elasticity of demand to summarize how responsive
quantity demanded is to price
• Own-price (product’s price)
• Cross-price (related goods – substitutes, complements)
• Income
• Demand curves are not always linear; and responsiveness can change with price
% changein Qd
elasticity 
% changein price
3 Major Categories for Own-Price
Demand Elasticity
• Always negative
• First law of demand
• Talk about it in absolute terms
• Less than |1| -> inelastic
• Not very price responsive
• Equal to |1| -> unit elastic
• % change in Qd = % change in price
• More than |1| -> (highly) elastic
• Very price responsive
What Affects Own-Price Demand
Elasticity?
• Availability and closeness of substitutes
• “better/closer” substitute makes it easier to switch
• Results in either
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•
Greater movement along the demand curve (own)
Greater shift of the demand curve (cross)
• Time
• More time to adjust, more options you can find
•
Long-run elasticity > short-run
• Proportion of Income spent on the good
• Larger proportion -> more sensitive to changes in Income
What Does the Magnitude of the
Elasticity Tell Us?
• Own-price
•
Larger absolute value (|e| > 1)
• Large changes in Qd with small changes in price
• Close substitutes exist (pepsi/coke)
• Or much consumption is discretionary (micro-brews)
•
Cross-price
• Large value (e >1)
• Close (or good) substitute for good exists
•
Complements
• Large absolute value (|e| > 1)
• Consumption in fixed proportions
• Income
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>1 superior (luxury?) good
>0 normal
< 0 inferior (Animal beer)