Unformatted text preview: Elasticity Deﬁnitions AEC303 Handout Elasticity:
1, Any elasticity is a pure number, that is, it has no units
2. Any elasticity is the ratio of (changes in) two percentage
3. An elasticity indicates how responsive one economic variable is to changes in another economic variable
4. Examples a. elasticity of demand (own price): How responsive the quantity
demanded of a good in to a change in its own price
b. elasticity of demand (Cross price): How responsive the demand for a
good is to changes in another good’s price. The other good is a
substitute or a complement good.
0. elasticity of supply. How responsive are producers in placing a good in
the market (quantity supplied) to a change in the good’s own price
d. income elasticity of demand: How responsive is the demand for a good
to changes in consumer income
Notation:
The Greek A denotes change over a ﬁnite range. A basic idea from calculus states that at the limit, A becomes d and therefore A x becomes dx at a point. Hence Aq becomes dq at
a point and A p becomes dp at a point. Arc elasticity: Calculate an elasticity from one point to another, perhaps from point A to
point B on a demand curve. 1. Oﬁen not entirely accurate
2. Basic formula for an Elasticity of Demand Ed % A in Quantity demanded
% A in the good’s own price 3. Equivalent formula .AQQ
Qd
Q
P
Invert and Multiply: AQd P
AP Qd Point Elasticity:
A becomes d so we can write 1% Qd
d_P
P ...
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 Spring '10
 DrCarlDillion

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