4 Types of Elasticity

1. 4 Types of Elasticity Elasticity Wrap-Up

2. Review: TOTAL REVENUE (TR) = Price X Quantity Sold TR – Total Costs (TC) PROFIT = All downward sloping linear D-curves have 3 ranges : elastic, inelastic & unit elastic Inelastic Range => Price ↑ => TR will _______ At unit elasticity => TR is at _________ TOTAL REVENUE

3. 4 Types of Elasticity • Price Elasticity of Demand = Ed • Cross Price Elasticity • Income Elasticity • Price Elasticity of Supply

4. % ∆ in Qty Dgood B Cross-price Ea,b = %∆ in Pgood A Cross-price elasticity of demand • How quantity demanded of one good responds to a change in price of another good • Substitutes have positivecross-price elasticity (Ea,b > 0) • Example:Price soda ↑ => Qty D other drinks ↑ • Complements have negativecross-price elasticity (Ea,b < 0) • Example:Price gas ↑ => Qty D large SUV’s ↓

5. Income Elasticity of Demand • Income elasticity of demand- how quantity demanded responds to a change in consumers’ income • EI = % ∆ in Qty Demanded % ∆ in Income • Normal Goods have positive Income elasticity (normal good = Income ↑, Qty D ↑) • Inferior Goods: EI < 0 (negative income elasticity) • Income elastic: EI >1 (considered a luxury) • Income inelastic: 1 > EI > 0 (considered a necessity)

6. Elasticity of Supply % ∆ Qty S ES = ------------ .% ∆ P Elastic: Es > 1 Inelastic: Es < 1 • How quantity supplied changes when price changes • Measures the ability of producers to increase quantity produced • Beach front property is inelastic (hard to increase quantity) • Books, cars are elastic • Time Period • Supply is more elastic in long run vs. short run • Time allows producers to ↑ supply

7. Practice Test #2