Elasticity of Demand
a measure of quantity demanded change with a change in price.
Elasticity of Demand = % change in quantity / % change in price
Very Elastic = Given % change in Price, large % change in Quantity
Very Inelastic = Given % change in Price, small % change in Quantity
Absolute value of Elasticity of Demand = |Ed|
When |Ed| > 1, we have elasticity. For 1% drop in price, the change in quantity is more than 1%. Total Revenue will go up.
When |Ed| = 1, we have unit elasticity. For 1% drop in price, the change in quantity is also equal to 1%. Approximately no change in Total Revenue.
When |Ed| < 1, we have inelasticity. For 1% drop in price, the change in quantity is less than 1%. Total Revenue will go down.
Cross Elasticity of Demand (CED): how price change of one good affects the other.
CED = % change in quantity of one good / % change in price of the other good
In case of nearly perfect substitute goods, CED approaches infinity (CED -> ∞)
Substitute products will have +ve CED, means P1↑ then Q2↑, P1↓ then Q2↓
Complement products will have -ve CED, means P1↑ then Q2↓, P1↓ then Q2↑
Unrelated products will have zero CED means, change in P1 will have no effect on Q2
Elasticity of Supply
Elasticity of Supply = % change in quantity / % change in price
- Direct Government Price Controls
- Price Floor
- Price Ceiling
- Taxes or Subsidies on a Market (The price and quantity outcomes are subject to change)
Excise Taxes: how does it change the supply curve
The supply curve shifts up by the amount of tax
Incidence of taxation