Microeconomics 1b, Foldvary

Elasticity

Taylor chapter 7

Elasticity: the responsiveness of a variable to a change in another variable.
X elasticity of Y = the responsiveness of Y or quantity of Y to a change in X.

Price elasticity of demand:

the responsiveness of quantity demanded to a change in the price.

Student's time elasticity of grades: responsiveness of grades to a change in study time.

Entertainment elasticity of enjoyment.

Measured as ((change in Q) / Q) divided by ((change in P) / P.
For Q, P, use the midpoints (averages).

Use absolute values.

Demand is elastic if price elasticity is high.
Inelastic if elasticity is low;
Quantity is not responsive to price change.

Perfectly inelastic, elastic.

What is revenue? How calculated? Price * quantity. Revenue = P * Q.
Elastic: Q change more than P change: R up if P down.
Inelastic: Q change less than P: R down if P down.
Unit Elastic: no change in R.
Elasticity of .5 means? Q demand increases. by ½ % if P down 1%.

Why important? Business wants to know effects of p change.
Grocery store hires an economic consultant to estimate the elasticity of demand for bananas.

Straight-line demand curve.

Does the elasticity remain the same?

elastic at top, inelastic at bottom

Demand elastic when there are substitutes.

Demand less elastic short run than long run.

Price elasticity of supply (q supplied).

The responsiveness of the quantity supplied to a change in p.

percentage change in Q supplied to a percentage change in p.

The price elasticity of linear supply depends on where the supply curve meets the axis.

Income elasticity of demand:

Responsiveness of demand to changes in income

Normal good: dm curve shifts out when incomes rise.

Inferior goods: dm curve shifts down as income rises. Good from a thrift shop.

Superior goods: % change quantity goes up more than income. Gourmet food.

Cross price elasticity of demand: the responsiveness of the quantity demanded of

one good when the price of another good changes.

What is a substitute? Increase of price in X more of Y demanded.

Demand curve for Y shifts up, to the right.

Substitutes: cross elasticity is positive.

Perfect substitute: don't care which one you get.

Complements: goods which go together. Computers & software.

Blackboard & chalk. Cream & coffee. Bread & butter.

Perfect complement: price of one goes up, Q of the other =.

Right & left shoes. Left ones free. Take any?

Complements: negative cross price elasticity.

If the cross price elasticity is zero, then there is no relationship between the

two goods.

Elasticity: effect of a sales tax

Highly responsive to price: quantity demanded much reduced.

Producer bears the burden.

Not responsive: consumer bears the burden.