# Elasticity by dfhdhdhdhjr

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```									Elasticity

   Elasticity is a general concept
that can be used to quantify
the response in one variable
when another variable
changes.
% A
elasticity of A with respect to B 
% B
Price Elasticity of Demand
   A popular measure of elasticity is price
elasticity of demand measures how
responsive consumers are to changes in
the price of a product.
% change in quantity demanded
price elasticity of demand 
% change in price

• The value of demand elasticity is
always negative, but it is stated in
absolute terms.
Types of Elasticity
Hypothetical Demand Elasticities for Four Products
%
% CHANGE IN
CHANGE
QUANTITY                      ELASTICITY
IN PRICE
PRODUCT                 DEMANDED (%QD)                 (%QD d %P)
(%P)
Insulin                 +10%               0%            0.0       Perfectly
inelastic
Basic telephone         +10%               -1%          -0.1       Inelastic
service
Beef                    +10%             -10%           -1.0       Unitarily elastic
Bananas                 +10%             -30%           -3.0       Elastic
•   When the percentage change in quantity demanded is smaller than
the percentage change in price, demand for that product is inelastic.

•   When the percentage change in quantity demanded is larger than the
percentage change in price, demand for that product is elastic.
Perfectly Elastic and
Perfectly Inelastic Demand
Curves

   When demand does not               Demand is perfectly elastic when
respond at all to a change in       quantity demanded drops to zero
price, demand is perfectly          at the slightest increase in price.
inelastic.
Calculating Elasticities
 Calculating   percentage changes:
P2  P
% change in price        1
x 100%
P1

Q2  Q1
% change in quantity demanded          x 100%
Q1
Calculating Elasticities
 Elasticityis a ratio of
percentages.
• Using the values on the
graph to compute
elasticity, using
percentage changes
yields the following
result:
 100%
price elasticity of demand            3.0
 33.3%
Calculating Elasticities
   A more accurate way of
computing elasticity than
percentage changes is the
midpoint formula:
Q2  Q1
x 100%
%  Qd (Q1  Q2 ) / 2

% P        P2  P1
x 100%
( P  P2 ) / 2
1

10  5              5
x 100%       x 100%
%  Qd (5  10) / 2           7.5           66.7%
                                 =          167
.
% P        2 3              -1           -40.0%
x 100%       x 100%
( 3  2) / 2          2.5
Calculating Elasticities
Here is how to interpret two different values
of elasticity:
   When e = 0.2, a 10% increase in price
leads to a 2% decrease in quantity
demanded.
   When e = 2.0, a 10% increase in price
leads to a 20% decrease in quantity
demanded.
Elasticity and Total Revenue
TR  P  Q
Effect of an
increase in     Effect of a
Type of                     Change in quantity   price on        decrease in
deman        Value of       versus change in     total           price on total
d            Ed             price                revenue         revenue
Elastic      Greater than   Larger percentage    Total revenue   Total revenue
1.0            change in quantity   decreases       increases
Inelastic    Less than      Smaller percentage   Total revenue   Total revenue
1.0            change in quantity   increases       decreases
Unitary     Equal to 1.0 Same percentage        Total revenue Total revenue does
                                          total revenues are
elastic When demand is inelastic, price anddoes not
change in quantity and               not change
directly related.price                  change
Price increases generate higher revenues.
When demand is elastic, price and total revenues are
indirectly related. Price increases generate lower revenues.
Other Important Elasticities
   Income elasticity of demand – measures
the responsiveness of demand to changes
in income.
% change in quantity demanded
income elasticity of demand 
% change in income

• Income elasticity of demand is
positive for normal goods and
negative for inferior goods.
Other Important Elasticities
   Cross-price elasticity of demand: A
measure of the response of the quantity of
one good demanded to a change in the
price of another good.
% change in quantity of Y demanded
cross - price elasticity of demand 
% change in price of X

• Cross-price elasticity of demand is
positive for substitutes and negative
for complements.
Other Important Elasticities
   Elasticity of supply: A measure of the
response of quantity of a good supplied to
a change in price of that good. Likely to
be positive in output markets.
% change in quantity supplied
elasticity of supply 
% change in price

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