 Elasticity of demand

*definition of elasticity
_ price elasticity of demand and its measurement
*_price elasticity of demand > measured by

*midpoint formula
price elasticity of demand

*elastic demand
*inelastic demand
*unit elastic demand
*perfectly inelastic demand
*perfectly elastic demand
*cross-price elasticity of demand :
the percentage change in quantity demanded of one good(A)
divided by the percentage change in the price of another good(B) ,,,

*CED =

1) substitutes : if the price of one product increase the demand for

other substitute good increase >>> positive .

2) complements: if price of one product increase , the demand of

other complementary good decrease >>>negative .

3) unrelated or independent : a fall in the price of good (A) leads to

no change in the demand for good (B) .
*income elasticity of demand :
A measure of the responsiveness of quantity demanded to
changes in income , measured by the percentage change in
quantity demanded divided by the percentage change in
income .

YED=

* income elasticity of demand can be positive or negative

positive < 1 normal and necessity .
positive > 1 normal and luxury .
Negative >>>>> inferior .
 Determinants of the price
elasticity of demand
1- close substitutes
2-passage of time
3- luxuries versus necessities
4-definition of market
5-share of good in the budget
 EXAMPLE 2:
“Blue Jeans” vs. “Clothing”
The prices of both goods rise by 20%.
For which good does Qd drop the most? Why?
For a narrowly defined good such as
blue jeans, there are many substitutes
(khakis, shorts, Speedos).
There are fewer substitutes available for
broadly defined goods.
(Can you think of a substitute for clothing,
other than living in a nudist colony?)
Lesson: Price elasticity is higher for narrowly defined
goods than broadly defined ones.
 *The relationship between price elasticity of demand and total
Revenue .

_The relationship between elasticity of demand and a firm's total revenue is an

important one.

*When demand is inelastic – a rise in price leads to a rise in total revenue .

*When demand is elastic – a fall in price leads to a rise in total
revenue .
*The price elasticity of supply and it’s
measurement :
the responsiveness of the quatity
supplied to achange in price
measured by diving the percentage
change in quantity supplied by the
percentage change in price .

Es =
*determinants of the price elasticity of supply :
depends on the ability of firms to alter the quantity they
produce as price increases .

Shortrun >>> inelastic

longrun >>> elastic