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Elasticity: Demand & Supply

Elasticity: Demand & Supply. How Responsive is Quantity Demanded/Supplied to Changes in Price. Types of Elasticities. Generally 3 categories we are concerned about Price elasticity Own-price: How quantity demanded changes with the (own) price Cross-price

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Elasticity: Demand & Supply

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  1. Elasticity: Demand & Supply How Responsive is Quantity Demanded/Supplied to Changes in Price

  2. Types of Elasticities • Generally 3 categories we are concerned about • Price elasticity • Own-price: • How quantity demanded changes with the (own) price • Cross-price • How quantity demanded changes with another (cross) good’s price changes • Income • How quantity demanded changes with a change in your income • Supply elasticity • How quantity supplied changes with a change in (own/market) price

  3. Own-Price (Demand) Elasiticity • Economist use the (own) price elasticity of demand to summarize how responsive quantity demanded is to price • Demand curves are not always linear; and responsiveness can change with price

  4. Demand ElasticityOwn-Price • Always negative • First law of demand • Talk about it in absolute terms • Less than |1| -> inelastic • Not very price responsive • Equal to |1| -> unit elastic • % change in Qd = % change in price • More than |1| -> (highly) elastic • Very price responsive

  5. Elasticity Measures • 3 Major Types for Demand • Own-price • Measures the change in quantity demanded with a change in the (own) good’s price • Always negative (F.L.O.D) • Always expressed in absolute value (as it’s always negative) • Cross-price • Measures the change in quantity demanded with a change in the price of a related good (e.g. complement or substitute) • Complement (-) Substitute (+) • Income • Measures the change in quantity demanded with a change in income • Normal/superiors goods (+) Inferior goods (-)

  6. What Affects Own-Price Demand Elasticity? • Availability and closeness of substitutes • “better/closer” substitute makes it to switch • Results in either • Greater movement along the demand curve (own) • Greater shift of the demand curve (cross) • Time • More time to adjust, more options you can find • Long-run elasticity > short-run • Proportion of Income spent on the good • Larger proportion -> more sensitive to changes in Income

  7. What Does the Magnitude of the Elasticity Tell Us? • Own-price • Larger absolute value (|e| > 1) • Large changes in Qd with small changes in price • Close substitutes exist (pepsi/coke) • Or much consumption is discretionary (micro-brews) • Cross-price • Large value (e >1) • Close (or good) substitute for good exists • Complements • Large absolute value (|e| > 1) • Consumption in fixed proportions • Income • >1 superior (luxury?) good • >0 normal • < 0 inferior (Animal beer)

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