pa 206 lecture sec 2

pa 206 lecture sec 2 - 2/16/06 Types of Elasticity 1. Price...

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2/16/06 2/16/06 Types of Elasticity 1. Price Elasticity of Supply : Sensitivity of Quantity Supply to a change in price i. Percentage Change in Quantity Supply / Percentage Change in Price ( Positive) 2. Income Elasticity of Demand : Sensitivity of quantity demand to a change in income i. Percentage Change in Quantity Demand / Percentage Change in Income. ( Positive for normal goods and services, Negative for inferior goods and services) 3. Cross Elasticity of Demand : a. Substitute: Sensitivity of Quantity Demand to a change in the price of a substitute. i. Percentage Change In Quantity Demand / Percentage Change in Price of a substitute. ( Positive) b. Complement: Sensitivity of Quantity Demand to a change in the price of a complement i. Percentage Change in Quantity Demand / Percentage Change in the Price of a complement. ( Negative) 4. Price Elasticity of Demand: Sensitivity of Quantity Demand to a change in the price. i. Percentage Change in Quantity Demand / Percentage Change in Price. ( Negative, but take absolute value!) 4 Determinants of Elasticity 1. Necessity vs. Luxury Elastic: Luxury Inelastic: Necessity 2. Number of Substitutes Elastic: Many Substitutes Inelastic: Few Substitutes 3. Fraction of Income Elastic: Large Fraction Inelastic: Small Fraction 4. Time Elapse – how much time elapsed since price increase Elastic: Long Time Elapse Inelastic: Short Time Elapse |%D QD /%D P | | Q 2 - Q 1/( Q 2 + Q 1)/2// P 2 - P 1/( P 2 + P 1)/2 | If Ed>1, Elastic (it will look flat) If Ed = 1, Unit Elastic (it will look normal) If 0<Ed<1, Inelastic (it will look steep)
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4 Types of Demand Curves 1. Perfectly Elastic P D Q Ed = 2. Perfectly Inelastic (Absolute Necessity) P D Q Ed = 0 3. Perfectly Unit Elastic 4. Straight Line Demand Curve P Elastic Unit Elastic
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This note was uploaded on 04/15/2008 for the course PA 206 taught by Professor Melendez during the Spring '07 term at Arizona.

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pa 206 lecture sec 2 - 2/16/06 Types of Elasticity 1. Price...

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