Elasticity

1
Elasticity

• Definition and Useful Applications

2
Price Elasticity of Demand

• Ratio of Percentage Change in Quantity Demanded
  to Percentage Change in Price

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Types of Elasticity

• Inelastic -- Percentage change in quantity
  demanded less than percentage change in price.
  Numerical value between 0 and -1
• Elastic -- Percentage changes in quantity
  demanded exceeds the percentage change in price.
  Absolute value greater than 1
• Unitary Elasticity- Numerical value equals 1.

4
Rank Elasticities

• Beef
• Salt
• European vacation
• Steak
• Honda Accord
• Dijon mustard

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Factors Affecting Elasticity of Demand

• Availability of Substitutes
• Fraction of Income Spent on Good
• Adjustment Time

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Perfectly Elastic
7
Perfectly Inelastic
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Elasticity vs Slope
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Elasticity vs Slope

• Slope ?P/?Q-2
• Elasticity at P1DQ(4.5-4)/4.25DP(1-2)/1.5
  DQ/DP-.177
• Elasticity at P6DQ(2-1.5)/1.75DP(6-7)/6.5
  DQ/DP-1.86

• Elasticity changes along the demand curve
• Unitary elasticity between P4 and P5
• Above point of unitary elasticity, demand is
  elastic
• Below point of unitary elasticity, demand is
  inelastic

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Revenue and Elasticity
11
Total Revenue

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Elasticity of Supply

• Ratio of Percentage Change in Quantity Supplied
  to Percentage Change in Price

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Ranking Supply Elasticities

• Rental Housing (short run)
• Retail sales clerks
• Computer programmers
• Tiger Woods
• Compact Discs