Elasticity 2

1
Elasticity 2

• Why are something are elastic and some inelastic?

2
Elasticity Review

• Perfectly elastic quantity responds enormously
  to price changes (E ?).
• Elastic the percentage change in quantity
  exceeds the percentage change in price (E gt1).

3
Elasticity Review

• Unit elastic the percentage change in quantity
  is the same as the percentage change in price (E
  1).

4
Elasticity Review

• Inelastic the percentage change in quantity is
  less than the percentage change in price (E lt1).

• Perfectly inelastic quantity does not respond
  at all to price changes (E 0).

5
Substitution and Elasticity

• As a general rule, the more substitutes a good
  has, the more elastic is its supply and demand.

6
Substitution and Demand

• The larger the time interval considered, or the
  longer the run, the more elastic is the goods
  demand curve.
• There are more substitutes in the long run than
  in the short run.
• The long run provides more options for change.

7
Substitution and Demand

• The less a good is a necessity, the more elastic
  its demand curve.

• Necessities tend to have fewer substitutes than
  do luxuries.

8
Substitution and Demand

• Demand becomes more elastic as the definition of
  a good becomes more specific.

• A broadly defined good like transportation does
  not have many substitutes so that demand will be
  inelastic.
• A more narrowly defined good like bus
  transportation will have more substitutes.

9
Substitution and Demand

• Demand for goods that represent a large
  proportion of one's budget are more elastic than
  demand for goods that represent a small
  proportion of one's budget.

10
Substitution and Demand

• Goods that cost very little relative to your
  total expenditures are not worth spending a lot
  of time figuring out if there is a good
  substitute.

• It is worth spending a lot of time looking for
  substitutes for goods that take a large portion
  of ones income.

11
Substitution and Supply

• The longer the time period considered, the more
  elastic the supply.
• The reasoning is the same as for demand.
• In the long run there are more options for change
  so it is easier (less costly) for suppliers to
  change into the production of another good.

12
Substitution and Supply

• Economists distinguish three time periods
  relevant to supply

• The instantaneous period.
• The short run.
• The long run.

13
Substitution and Supply

• In the instantaneous period, quantity supplied is
  fixed the elasticity of supply is perfectly
  inelastic.

• This supply is sometimes called the momentary
  supply.

14
Substitution and Supply

• In the short run, some substitution is possible
  the short-run supply curve is somewhat elastic.

• In the long run, significant substitution is
  possible the supply curve becomes very elastic.

15
How Substitution Factors Affect Specific Decisions

• Suppose youve been asked to evaluate the
  potential impact of a 10 gas tax increase in
  Washington, D.C. and in the entire nation.

16
Evaluating the 10 Gas Tax Increase

• Wed expect the short run the demand curve for
  gasoline to be less elastic than in the long run.
• In the long run, motorists would switch to fuel
  efficient cars.

17
Evaluating the 10 Gas Tax Increase

• Demand is probably inelastic for the entire U.S.

• Gasoline is considered a necessity
• It is only a small part of what it costs to drive.

18
Evaluating the 10 Gas Tax Increase

• Demand for gasoline is very elastic in
  Washington, D.C.

• Some may switch to an alternative form of
  transportation.
• Others would go to neighboring states to buy
  gasoline.

19
Empirical Estimates of Elasticities

• The following table provides short- and long-term
  estimates of elasticities for a number of goods.

20
Short-Run and Long-Run Elasticities of Demand