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Elasticity

This document defines and explains several types of elasticities in economics, including price elasticity of demand, income elasticity of demand, cross elasticity of demand, price elasticity of supply, and advertising elasticity of demand. It provides formulas and explanations for determining whether demand or supply is elastic, inelastic, or unitary elastic based on the measurement of the elasticity. Graphs and examples are also included to illustrate different types of goods and the relationships between goods based on these elasticity measurements.

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Betty Bavorová
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613 views

Elasticity

This document defines and explains several types of elasticities in economics, including price elasticity of demand, income elasticity of demand, cross elasticity of demand, price elasticity of supply, and advertising elasticity of demand. It provides formulas and explanations for determining whether demand or supply is elastic, inelastic, or unitary elastic based on the measurement of the elasticity. Graphs and examples are also included to illustrate different types of goods and the relationships between goods based on these elasticity measurements.

Uploaded by

Betty Bavorová
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Elasticities

Price elasticity of demand (PED)

measures how sensitive the quantity demanded is to changes in the price

ELASTIC:
As P increases by 100%, Q decreases by >100%.
Have many substitutes

(http://img.sparknotes.com/figures/5/5259b727009a2736d6ad639bab3494ff/elastic.gif) (http://www.personal.psu.edu/~dxl31/econ102/elastic.png)

INELASTIC:
As P increases by 100%, Q decreases by <100%.
Have few substitutes.

(http://i.investopedia.com/inv/tutorials/site/economics/economics13.gif)

(http://www.personal.psu.edu/~dxl31/econ2/Spring_2000/inelastic.gif)

|PED| > 1 . elastic

|PED| < 1 inelastic

|PED| = 1 . unitary elastic

PED > 0

. Giffen good

Revenue and different elasticities


Elastic demand: increase quantity
Inelastic demand: increase price.
Unitary elasticity: change nothing.

Income elasticity of demand (YED)


Measures the change in demand for a product if there is a change in consumer income (you can
determine what sort of good that good is.
Y income

YED
YED>1
YED = 1
1>YED>0
YED = 0
YED<0

Type of good
elastic
luxury
normal
normal
inelastic
necessary
buying this good does not depend on price at all
inferior

Engel curves
(http://www.intelligenteconomist.com/income-elasticity-of-demandyed/)

A graphical representation of YED


Can be linear, but usually is not; often
looks like a fish

Cross elasticity of demand (XED)

A measure of responsiveness of change in the demand of one product to change of price of another good
Determines, whether goods are substitutes or complements.
(
(
XED
XED > 0
XED = 0
XED < 0

)
)
relationship
substitutes
no
relationship
between
goods
complements

Price elasticity of supply (PES)


A measure of how quantity supplied responds to the price

PES
PES > 1
0 < PES < 1
PES = 0

elastic
inelastic
fixed quantity supplied

Advertising Elasticity of Demand (AED)


A measure of how sensitive the QD is to changes in an organizations advertising expenditure.
AE advertising expenditure

AED
AED > 1

elastic demand

AED < 1

inelastic demand

demand is very sensitive to


advertising
advertising brings more than
proportional change in
demand
demand is insensitive to
advertising
advertising brings less than

proportional change in
demand

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