Elasticity
Elasticity
measures how much one variable responds to changes in another variable.
Price elasticity of demand
measures how much
Q
d
responds to a change in
P
.
Income elasticity of demand
:
measures the response of
Q
d
to a change in consumer income
For normal goods, income elasticity > 0.
For necessities, it is between 0 and 1
For luxury goods, it is greater than 1
For
inferior
goods, income elasticity < 0.
Cross-price elasticity of demand
:
measures the response of demand for one good to changes in
the price of another good
Price elasticity of supply
measures how much
Q
s
responds to a change in
P
.
x
To find the % change for Elasticity, use the midpoint formula
Determinants of Price Elasticity
x
Availability of close substitutes
o
Breakfast cereal (more) vs. Sunscreen (less)
x
Necessities vs. luxuries
o
A Caribbean Cruise (more) vs. Insulin (less)
x
Definition of the market
o
Market for blue jeans (more) vs. Market for clothing (less)
x
Share of consumer’s budget
o
Restaurant Meals (more) vs. Pens (less)
x
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- Fall '10
- IreneFoster
- Economics, Income Elasticity, Price Elasticity, Supply And Demand, market o Market, Elasticity Elasticity measures
-
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