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UW-Madison ECON 101 - Elasticity

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ElasticityA. Elasticity1. Elasticity in general= % change in one variable/ % change in another variable2. Four kinds of Elasticitya. The price elasticity of demand= % change in quantity of good A/ %change in price A1. On a straight, linear demand curve Elasticity of demand is NOT constantb. Income elasticity of demand= %change in quantity of good A/ %change of incomec. Cross price elasticity of demand= %change in quantity demanded of X/ %change of Pyd. Price elasticity of supply= %change in quantity supplied of X/ %change of price of AB. Price elasticity of demand and total revenueIf P decreases, TR increases Demand elastic Ed> 1If P increases, TR decreasesIF P and TR decreases Demand InelasticEd< 1IF P increases, TR increasesIF P increases, TR same Demand is unit elasticEd= 1IF P decreases, TR same1. Midpoint= unit elastic2. Points above midpoint- elastic3. Points below midpoint- inelasticC. Calculating elasticity demanded1. Arc elasticity formula- need 2 points on a demand curvea. % change= New value- initial value/ initial value) x 100%vsb. % change= new value- initial value/ average of new and initial value) x 100%2. Point elasticity formula- one point and the equation for demand curve a. Ex: p= 11- Qb. Formula= (-1/ slope)x(P/Q) ** where is TR maximized on a straight line demand curve? at the unit elastic point (mid point)D. Determinants of elasticity demand1. Substitutions of other goodsa. Narrowness of definition of goodb. Tastes and preferencesc. time horizon2. Importance of item in budgetE. Other elasticities and their interpretations1. Income elasticity of demand= % change of Quantity demanded of good a/ %change of incomea. Income increases- Qd increases= EI= +/+ >0= normal goodb. Income increases- QD decreases= EI=-/+ <0= inferior good2. Cross price elasticity of demand- % change of Qd of good X/ %change in Price of good ya. Exy >0= +/+= Py increases and Qdx increases, these goods are substitutes b. Exy<0= -/+= Py increases and Qdx decreases, these goods are complementsc. Exy= 0 = x and y have no relationship3. Price elasticity of Supplya. Es= % change of quantity supplied of good A/ % change in price of good A1. Use arc or point formulab. Determinants of elasticity of supply1. Time horizon- longer the time horizon, the more elastic the supply


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