Elasticity A Brief Lesson by Nancy Carter

Definition Elasticity is a measure of sensitivity. We use the coefficient of elasticity to evaluate how sensitive one variable is to the change in another.

General Formulas I suggest you learn the relationships and then worry about formulae. There is a basic set you will use that adapt to all types of elasticity. The basic formulae you will use are 1.The midpoint formula for calculating percentage change 2.The formula for the coefficient of elasticity

Variables Used Δ = Change Y = Income P = Price

Midpoint Formula The Midpoint formula gives you a better measure of elasticity It is the difference in values divided by the average as you move from one point to the next. Example: Menu

Coefficient of Elasticity Formula The name of the type of elasticity tells you which variable goes in the numerator and which in the denominator. The first variable in the name is the denominator value and the last is the numerator value. Menu

Four Types of Elasticity Exit

Price Elasticity of Demand Measures the sensitivity of Demand to a change in the price of the good. HomeMidpointCoefficientExitMenu

Determinants of Price Elasticity of Demand Tastes and Preferences Income Number of Substitutes Available Luxury versus Necessity Time Expectations CoefficientMidpointHomeExitMenu

Ranges of Price Elasticity of Demand HomeMidpointCoefficientExitMenu If Є=0 Perfectly Inelastic If Є<1 Relatively Inelastic If Є=1 Unit Elastic If Є>1 Relatively Elastic If Є= ∞ Perfectly Elastic

Price Elasticity of Supply Measures the sensitivity of Supply to a change in the price of the good. CoefficientMidpointHomeExitMenu

Determinants of Price Elasticity of Supply Time is the only significant determinant of the Price Elasticity of Supply. MidpointHomeExitMenuCoefficient

Ranges of Price Elasticity of Supply CoefficientMidpointHomeExitMenu If Є=0 Perfectly Inelastic If Є<1 Relatively Inelastic If Є=1 Unit Elastic If Є>1 Relatively Elastic If Є= ∞ Perfectly Elastic

Income Elasticity of Demand Measures the sensitivity of Demand to a change in Income CoefficientMidpoint HomeExitMenu

Determinants of Income Elasticity of Demand Normal Good – Demand rises with Income – Coefficient is Positive Inferior Good – Demand falls as Income Rises – Coefficient is Negative CoefficientMidpointHomeExitMenu

Cross Price Elasticity of Demand Measures the sensitivity of Demand to a price change of another good. CoefficientMidpointHomeExitMenu

Complements – Items consumed together – Coefficient will be Negative Substitutes – Items consumed instead of – Coefficient will be Positive CoefficientMidpointHomeExitMenu