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Elasticity
McGraw-Hill/Irwin
LO1
price changes
Elastic demand
Sensitive to price changes
Large change in quantity
Inelastic demand
Insensitive to price changes
Small change in quantity
4-2
Ed =
LO1
4-3
LO1
Change in quantity
=
Sum of quantities / 2
Change in price
Sum of prices / 2
4-4
Use percentages
Unit free measure
Compare responsiveness across
LO1
products
Eliminate the minus sign
Easier to compare elasticities
4-5
Perfectly elastic
LO1
4-6
Extreme Cases
P
D1
Perfectly
inelastic
demand
(Ed = 0)
4-7
Extreme Cases
P
D2
Perfectly
elastic
demand
(Ed = )
4-8
LO2
direction
Elastic demand
P and TR move in opposite
directions
4-9
Description
Qd changes by a
larger
percentage than
does price
Total revenue
decreases
Total revenue
increases
Greater than 1
(Ed > 1)
Elastic or
relatively
elastic
Equal to 1
(Ed = 1)
Total revenue
is unchanged
Total revenue
is unchanged
Less than 1
(Ed < 1)
Inelastic or
relatively
inelastic
Total revenue
increases
Total revenue
decreases
LO2
Qd changes by a
smaller
percentage than
does price
4-10
Substitutability
More substitutes, demand is more elastic
Proportion of Income
Higher proportion of income, demand is
more elastic
Time
More time available, demand is more elastic
LO1
4-11
LO3
4-12
Es =
LO3
4-13
Ex,y =
Percentage change in price of product Y
LO4
4-14
to changes in income
Normal goods positive sign
Inferior goods negative sign
Percentage change
in quantity demanded
Ei =
Percentage change in income
LO4
4-15
Ex,y and Ei
Cross and Income Elasticities of Demand
Value of
Coefficient
Cross elasticity:
Positive (Ewz > 0)
Negative (Exy < 0)
Description
Type of Good(s)
Substitutes
Income elasticity:
Positive (Ei >0)
Normal or superior
Negative (Ei<0)
Inferior
LO4
4-16