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Elasticity: Demand & Supply. How Responsive is Quantity Demanded/Supplied to Changes in Price. Types of Elasticities. Generally 3 categories we are concerned about Price elasticity Own-price: How quantity demanded changes with the (own) price Cross-price

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elasticity demand supply

Elasticity: Demand & Supply

How Responsive is Quantity Demanded/Supplied to

Changes in Price

types of elasticities
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
      • How quantity demanded changes with a change in your income
    • Supply elasticity
      • How quantity supplied changes with a change in (own/market) price
own price demand elasiticity
Own-Price (Demand) Elasiticity
  • Economist use the (own) price elasticity of demand to summarize how responsive quantity demanded is to price
  • Demand curves are not always linear; and responsiveness can change with price
demand elasticity own price
Demand ElasticityOwn-Price
  • 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
elasticity measures
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)
    • 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 (-)
what affects own price demand elasticity
What Affects Own-Price Demand Elasticity?
  • Availability and closeness of substitutes
    • “better/closer” substitute makes it to switch
    • Results in either
      • 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
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
    • >1 superior (luxury?) good
    • >0 normal
    • < 0 inferior (Animal beer)