CHAPTER 20

DEMAND AND SUPPLY ELASTICITY

I. Price Elasticity of Demand

A. Concept of Price Elasticity

The responsiveness or sensitivity of quantity

demanded to a change in price.

B. General Formula for Price Elasticity

Percentage change in quantity demanded

Percentage change in price

C. Mid-Points Formula

E/demand =

D. Interpreting the Elasticity Coefficient

A coefficient higher than 1 is elastic

" " lower " 1 is inelastic

" " exactly 1 is unitary

A negative coefficient implies that a lower

price results is lower quantities sold.

E. Extreme Elasticities

Perfectly Elastic Perfectly Inelastic

Demand or Supply Demand or Supply

II. Total Revenue Test

If Demand is Elastic If Demand is Inelastic

P TR P TR

P TR P TR

III. What Determines Price Elasticity

A. The number and quality of substitute goods.

B. The proportion of income the purchase makes up.

C. The size of the expenditure.

D. The time available for adjustments.

E. Luxuries tend to be elastic.

F. Necessities tend to be inelastic.

G. Durable goods tend to be elastic. H. Promotion.

IV. Cross Elasticity of Demand

Shows whether two goods are substitutes or

complements.

Cross Elasticity Percentage Change in Q

Formula Percentage Change in P

If two goods are substitutes, the coefficient will be

positive.

If two goods are complements, the coefficient will be

negative.

V. Income Elasticity of Demand

Shows the responsiveness of certain goods to changes

in real consumer income.

Income Elasticity % Change in Q Demanded

Formula % Change in Real Income

Income-sensitive products have a coefficient higher

than 1.

The coefficient will vary according to income level.

VI. Elasticity of Supply

Shows the responsiveness of quantity supplied to a

change in price.

General Percentage Change in Q Supplied

Formula Percentage Change in Price

Determinants of Supply Elasticity

A....

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