Demand and Supply Elasticities

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Demand and Supply Elasticities
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Price Elasticity of Demand

• Price elasticity of demand the percentage change
  in the quantity demanded that results from a 1
  percent change in the price

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Special Cases of Demand Elasticities

1. Perfectly inelastic demand ep 0
2. Inelastic demand ep lt 1
3. Unit elastic demand ep 1
4. Elastic demand ep gt 1
5. Perfectly elastic demand ep infinity

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Factors that Affect the Elasticity of Demand

• Availability of close substitutes
• Greater availability implies more elastic
• Luxuries vs. necessities
• Luxuries are more elastic
• Budget share
• Greater share implies more elastic
• Time horizon
• Longer horizon implies more elastic
• Definition of the market
• Narrower definition implies more elastic

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Total Revenue and Demand Elasticity

• Total revenue TR P x Q
• If ep lt 1, then an increase (decrease) in P will
  increase (decrease) TR
• If ep 1, then a change in P will not change TR
• If ep gt 1, then an increase (decrease) in P will
  decrease (increase) TR

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Income Elasticity of Demand

• Income elasticity of demand percentage change in
  quantity demanded given a 1 percent change in
  income

• eI gt 0 implies a normal good
• eI lt 0 implies an inferior good

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Cross-Price Elasticity of Demand

• Cross price elasticity of demand percentage
  change in quantity demanded of good A given a 1
  percent change in the price of good B

• eXP gt 0 implies substitutes
• eXP lt 0 implies complements

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Elasticity of Supply

• Elasticity of supply the percentage change in
  the quantity supplied that results from a 1
  percent change in the price
• Calculate es using the same midpoint formula that
  we used for ep

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Special Cases of Supply Elasticities

• Perfectly inelastic supply es 0
• Inelastic supply es lt 1
• Unit elastic supply es 1
• Elastic supply es gt 1
• Perfectly elastic supply es infinity

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Factors that Affect the Elasticity of Supply

• Feasibility of production
• More feasible implies more elastic
• Time horizon
• Longer horizon implies more elastic