Elasticity

# Elasticity - Perfectly inelastic vertical line •...

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Elasticity Describing quantitatively how consumers and producers (buyers and sellers) respond to change in prices Elasticity of Demand In general, a demand curve tells us that price and the quantity demanded are inversely related- if price increases, quantity demanded will decrease … but by how much? Steep slope = small decrease Semi steep slope = semi decrease Flat slope = big decrease Elasticity of Demand is the concept that tells us the relative change in quantity demanded associated with a relative change in price (how responsive quantity demanded is to a price change) Ed < 1 = Inelastic Ed = 1 = Unitary Ed > 1 = Elastic Ed = 0 = perfectly inelastic Ed = infinity = perfectly elastic Price Discrimination / Targeting Charging different prices to different consumers for the same good Special cases

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Unformatted text preview: Perfectly inelastic- vertical line • Perfectly elastic- horizontal line Why are some goods inelastic and other elastic in demand? • Inelastic = viewd by consumers as “necessity” • Inelastic = amount of budget Why is Elasticity of Demand Important? • Goods with an elastic demand, if price is lowered, total revenue and demand go up • Elasticity of demand changes along the curve EI= Income Elasticity • EI = % change in Q / % Change in I • EI > 0 = normal good o EI< 1 = income inelastic o EI> 1 = income-elastic • EI<0 = inferior good Cross Price Elasticity • Exy > 0 = substitutes • Exy < 0 = complements What about Supply? • Elasticity of Supply- describes how responsive producers (sellers) are to a change in pirce • Es = % change in q / % change in p • Read 352 – 357...
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## This note was uploaded on 03/30/2008 for the course AAEC 1006 taught by Professor Mjellerbrock during the Spring '07 term at Virginia Tech.

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Elasticity - Perfectly inelastic vertical line •...

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