Elasticity is a units free measure of the degree to which the quantity supplied or demanded of a product responds to changes in any one of the variables. Price is the most important variable that affects the demand quantity. Income Elasticity measures the sensitivity of an item's demand to changes in income levels.
Elasticity is a units free measure of the degree to which the quantity supplied or demanded of a product responds to changes in any one of the variables. Price is the most important variable that affects the demand quantity. Income Elasticity measures the sensitivity of an item's demand to changes in income levels.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
Elasticity is a units free measure of the degree to which the quantity supplied or demanded of a product responds to changes in any one of the variables. Price is the most important variable that affects the demand quantity. Income Elasticity measures the sensitivity of an item's demand to changes in income levels.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
12:45 PM • Elasticity is a units free measure of the degree to which the quantity supplied or demanded of a product responds to changes in any one of the variables while everything else remains constant • 3 demand elasticity measures reflect the factors that affect the quantity demanded( Item Price, Price of Related items and incomes) o Price Elasticity • Price is the most important variable that affects the demand quantity • A measure of sensitivity along the demand curve Price elasticity of demand = % change in quantity demanded / % change in price Where: Percentage change = Change in value/average value = Ending – Beginning /Avg Value
When E > 1 -> Demand is elastic - Price changes cause opposite
movements in Revenue When E < 1 -> Demand is inelastic - Price changes cause direct movements in Revenue When E= 1 -> Demand is Unit Elastic - No Change at all
o A perfectly elastic demand curve is a horizontal line
o A perfectly inelastic demand curve is a vertical line o Unit Elastic demand curves is downward sloping o Downward sloping straight lines are elastic when prices are high and inelastic when prices are low o 3 primary factors that influence price elasticity • Substitutes - demand is more elastic for products that have many close substitutes. Luxuries are more elastic than necessities • Proportion of Income Spent - more elasticity exists when a larger proportion of income is spent on a product • Time elapsed since price change
o Cross elasticity - measures how a products demand responds to changes
in another product's price • Similar formula to price elasticity but value can be + or - and the price change is from the 2nd product • When + - the two items are substitutes. If value is high they are very close substitutes and not very close when value is low • When - the two items are complements
o Income Elasticity - Measures the sensitivity of an item's demand to
changes in income levels • Same as other formulas but change in income is in denominator now. • Like cross elasticity can be + or - Income Product Type Elasticity Type Elasticity + and > 1 Normal Elastic + and < 1 Normal Inelastic Negative Inferior
• Supply Elasticity - measures the sensitivity of the quantity supplied to its