Elasticity - a Measure of How One Variable Responds to a Change in Another Variable

Elasticity

Elasticity - A measure of how one variable responds to a change in another variable.

·  If there is a “large” reaction the relationship is said to be elastic.
(more elastic when substitutes exist, time to adjust, narrowly defined market, etc.) (related to slope: the steeper the curve the more inelastic the relationship)

·  If there is little change the relationship is said to be inelastic.

- Measured as a % change in one variable relative to a % change in the other variable.

·  % change is calculated using the mid-point formula.

·  % change from A to B = .

·  With the midpoint formula the direction does not change the magnitude.

EX: % change from 5 to 15 = =100%

% change from 15 to 5= = -100%.

1. Demand Elasticity (own price elasticity) =

=0 perfectly inelastic Total Revenue=Price x Quantity Total

<1 inelastic ------raising price raises TR

=1 unit elastic ------raising price does not change TR

>1 elastic ------raising price lowers TR

= perfectly elastic

1. Income Elasticity =

<0 Inferior Good

>0 Normal Good

>0 and <1 Necessity

>1 Luxury

1. Cross Price Elasticity =

<0 Compliments

>0 Substitutes

1. Supply Elasticity =

=0 perfectly inelastic

<1 inelastic

=1 unit elastic

>1 elastic

= perfectly elastic