Elasticity
A measure of the responsiveness of the quantity demanded or quantity supplied to the changes in one of their determinants
Price elasticity of demand
A measure of how quantity demanded of a good responds to a change in its price
Change in % Qd/ change in % P
Determinants of the elasticity of demand
1) availability of close substitutes;
2) necessities and luxuries;
3) defining the market broadly and narrowly;
4) time horizon;
5) the proportion of income spent on a good
Formula for elasticity of demand
(Q2-Q1)/(Q2+Q1)/2 / (P2-P1)/(P2+P1)/2
Types of elasticity
Inelastic <1
Unit elasticity =1 (Единичная эластичность)
Elastic >1
Total Revenue
The amount paid by buyers and received by sellers of a good
TR=Q*P
TR and elasticity
If the P ⬆️ and TR ⬆️ — Inelastic
If P ⬆️ and TR ⬇️ — Elastic
If P ⬆️ and TR ▶️ remain the same — Unit Elasticity
Elasticity on the demand curve
> > > Is not constant, even though the slope is constant, because the spoke is the ration of change in variables while the elasticity is the ration of percentage change in them
> > > At points with a law P and high Q a linear demand curve is INELASTIC
At points with a high P and law Q a linear demand curve is ELASTIC
Income Elasticity of Demand (YED)
A measure of how the quantity demanded of a good responds to a change in consumers’ income
YED for different goods
1) Normal good had positive elasticity. Inferior good had negative elasticity
2) 0 < YED < 1 —> normal YED < 0 —> Inferior YED > 1 —> Luxury
Engel’s Law
An increase in income of a household decreases the proportion of the income spent on food (nourishment), even though the total amount of expenditure increases
Price elasticity of supply
A measure how quantity supplied of a good responds to a change in its price
NB for law Q elasticity ⬆️
For high Q elasticity ⬇️
Cross-price elasticity of demand
A measure of how the quantity demanded of one good responds to a change in the price of another good
(The matter of substitutes and complements)
> > > Substitutes have **positive cross-price elasticity
Complements have negative cross-price elasticity
