Microeconomics Elasticity How much will the quantity demanded of a product change relative to a change in price If it s elastic we ll buy a lot more ice cream If it s inelastic we won t salt Calculation for Price Elasticity of Demand P E D change in Qd change in P the What matters is whether or not it s greater than equal to or less than 1 If it s 1 it s inelastic which means it s not responsive If it s 1 it s elastic which means demand is responsive to price If it s 1 then it is unitary elastic Unitary elastic means that the demand changes proportionately with the price Price inelastic P elastic Qd Qd t Ex cigarettes are 0 4 in elasticity inelastic For every 1 that the price of cigarettes goes up in the long run the demand only goes down 0 4 Price Elasticity of Supply If the price we can charge goes up what changes in our quantity supplied How quickly can a firm respond to a change in the price of its products Formula is the same always positive If they can t respond quickly then the price elasticity of supply is inelastic P Vertical inelastic P upward sloping elastic 1 2 Qs Qs 1 Examples Art by dead artists seats at NEU E p s 0 unrelated infinite when it s horizontal 2 Examples Lemonade at a lemonade stand Elastic you can always supply more of the product Income Elasticity change in quantity demanded change in income How much more of things do we buy when our income changes goes up Most goods are good goods AKA normal goods you buy more when you have more money A good is normal when income elasticity is 0 If it s 0 then it s an inferior good which means you buy less if it as income increases examples beer used furniture children
View Full Document
Unlocking...