Unit 4

Word	Meaning
elasticity	measures how responsive Qd or Qs is to changes in P and other determinants
total revenue / TR	= price x quantity traded
price elasticity of demand / Ep / coefficient of elasticity	how much the quantity demanded of a good responds to a change in the price of that good $=\frac{\%\Delta Qd}{\%\Delta P} = \frac{\Delta Qd}{\Delta P}\times\frac{P}{Qd}$ ($\frac{\Delta Qd}{\Delta P}$ is the slope of a linear demand curve) will always be negative, we drop it not constant along a linear demand curve
perfectly inelastic demand	a change in P does not leads to change in Qd, Ep = 0, vertical demand curve
inelastic demand	a change in P leads to a proportionately smaller change in Qd, Ep < 1, steeper demand curve
unit elastic demand	a change in P leads to a proportionately equal change in Qd, Ep = 1, TR at max
elastic demand	a change in P leads to a proportionately bigger change in Qd, Ep > 1, flatter demand curve
perfectly elastic demand	a change in P leads to an infinitely great change in Qd, Ep = $\infty$, horizontal demand curve
income elasticity of demand / EN	how much the quantity demanded of a good responds to a change in consumers' income $=\frac{\%\Delta Qd}{\%\Delta\text{income}}$ EN > 0: normal good; EN < 0: inferior good
income inelastic	|EN| < 1
income elastic	|EN| > 1
cross-price elasticity of demand / Eab	the response of Qd of a good "a" to a change in price of a related good "b" $= \frac{\%\Delta Qd_a}{\%\Delta P_b}$ Eab > 0: goods are substitutes; Eab < 0: goods are complements; Eab = 0: goods are not related
price elasticity of supply / ES	how much the quantity supplied of a good responds to a change in the price of that good $=\frac{\%\Delta Qs}{\%\Delta P}=\frac{\Delta Qs}{\Delta P}\times\frac{P}{Qs}$ will always be positive
perfectly inelastic supply	a change in P does not leads to change in Qs, ES = 0, vertical supply curve
inelastic supply	a change in P leads to a proportionately smaller change in Qs, ES < 1, steeper supply curve
unit elastic supply	a change in P leads to a proportionately equal change in QS, ES = 1
elastic supply	a change in P leads to a proportionately bigger change in Qs, ES > 1, flatter supply curve
perfectly elastic supply	a change in P leads to an infinitely great change in Qs, ES = $\infty$, horizontal supply curve

Some Generalities About Demand Elasticities

• Goods that are necessities tend to have inelastic demand
• Goods that are luxuries tend to have elastic demand
• Goods that have close substitutes tend to have elastic demand
• Goods tend to have more elastic demand over the long run
• The more narrowly defined the market, the more elastic the demand for that good
• food: inelastic
• vegetables: more elastic
• broccoli: even more elastic
• How much of your budget you spend on a good
• a large proportion of your budget: elastic demand
• a small proportion of your budget: inelastic demand

Some Generalities About Income Elasticities

• Goods that are necessities tend to be income inelastic
• Goods that are luxuries tend to be income elastic

Some Generalities About Supply Elasticities

• Supply tends to be more elastic in the long run
• Goods whose factors of production are readily available have more elastic supply
• Goods whose factors of production are mobile tend to have more elastic supply
• Goods that are easy to produce tend to have elastic supply
• Goods that can be easily stored tend to have elastic supply

Price Elasticity vs Total Revenue

• TR will increase if price increase and the demand is inelastic
• TR will increase if price decrease and the demand is elastic
• TR will not change no matter you increase or decrease price when demand is unit elastic

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Last update: October 5, 2021
Created: October 4, 2021