Elasticity

Elasticity

1. Inelastic

   • Price increases
   • Consumption unchanged
   • Most essential goods

2. Elastic

   • Price increases
   • Consumption changes

3. Determinants

   • Taste
   • Income
   • Price of related goods
   • Expectations/time
   • # of buyers

4. Elasticity is highly subjective

5. Price Elasticity

   • Relation between price and consumption
     • A.K.A. demand
     • (Change in quantity demanded) _____________ (Change in price)
       • >1, product is elastic
       • >1, product is inelastic

6. Unit Elasticity

   • When elasticity =1, revenue is maximized
   • Goal of all businesses

7. Perfectly Elastic

   • Price remains constant
   • Demand changes
   • Ex.: Dollar Tree

8. Perfectly Inelastic

   • Quantity remains constant
   • Price changes
   • Ex.: Gasoline
   • Ex.: Medication

9. Income Elasticity

   • Normal goods
     • Positive elasticity
       • Income increases, buy more normal goods
       • Income decreases, buy fewer normal goods
   • Inferior goods
     • Negative elasticity
       • Income increases, buy fewer inferior goods
       • Income decreases, buy more inferior goods

10. Cross-Price Elasticity

    • Change in quantity demanded of A _____________ change in price of B
    • Substitutes
      • Direct relation of change
        • Price of A increases
        • Quantity demanded of A decreases
        • Quantity demanded of B increases
    • Complements
      • Inverse relation of change
        • Price of A increases
        • Quantity demanded of A decreases
        • Demand for B decreases