- Basic Concepts
- P x Q = TR
- P- price
- Q- quantity demanded
- TR- total revenue
- Unit Elastic Change
- proportional change
- ex: P increases by 20 percent, Q decreases by 20 percent, so TR stays the same

- Elastic Change
- greater than proportional change
- ex: P increases by 20 percent, Q decreases by 25 percent, so TR decreases

- Inelastic Change
- less than proportional change
- ex: P increases by 20 percent, Q decreases by 10 percent, so TR increases

- Price Elasticity of Demand
- Price Elasticity of Demand = (% Change in Q) / (% Change in P)
- = 1 – unit elastic
- < 1 – inelastic
- > 1 – elastic

- Price Elasticity of Demand = (% Change in Q) / (% Change in P)
- Numerical Coefficient of Elasticity (E)
- E
_{d }= (Change in Q / Change in P) x [ .5(P_{1}+ P_{2}) / .5(Q_{1}+ Q_{2}) ]

- E
- Price Elasticity of Supply
- As P increases, Q supplied also increases
- Total revenue check useless in the supply case
- E
_{s }= (Change in Q / Change in P) x [ .5(P_{1}+ P_{2}) / .5(Q_{1}+ Q_{2}) ]

- P x Q = TR
- Limits and Degrees of Elasticity
- Long vs. Short Run
- The long run demand function for any given product will be relatively more elastic than the demand function in the short run
- Long run
- supply has fully adjusted to demand
- buyers are more resistant to prices increases for a given product

- Short run
- buyers have more limited choices because of the relative scarcity of products

- Graphically
- Perfectly elastic demand curve
- horizontal function (slope of zero)

- Perfectly inelastic demand curve
- vertical function (slope undefined)

- Perfectly elastic demand curve
- Degrees of Elasticity
- Depend on the competitive nature of the market
- Depend on the nature of the product
- luxury goods will be more sensitive to price increases than goods that are necessities

- Long vs. Short Run
- Cross-Elasticity of Demand
- Ultimate Question
- What effect on quantities demanded of one product will a price change in another product have?
- Ultimate answer gives us clues to:
- market share
- the degree of competition that may extend from one market to another
- the related leverage a dominant product in one market may have on products in another

- Mathematically
- CPED = (% Change in Quantity Demanded of Product Y) / (% Change of Price of Product X)
- CPED – Cross Price Elasticity of Demand

- Determinants of Price Elasticity of Demand
- The period of adjustment
- “long run vs. short run”
- long run is more elastic

- The ratio of the cost of a particular product to the total budget of the consumer
- mathematically = ($ Cost of Product A) / ($ Total Budget)
- the higher the value, the more elastic the product is

- Competitive structure of the market and consumer choices
- as both increase, elasticity increases

- The period of adjustment
- Income Elasticity of Demand
- Mathematically
- Income Elasticity of Demand = (% Change in Q Demanded) / (% Change in Consumer I)
- I – income

- For normal goods
- this ratio will have a positive sign
- as I increases, Q demanded will increase

- Meaning of values
- = 1 – unit elastic
- < 1 – inelastic
- > 1 – elastic

- Mathematically
- Price Elasticity of Supply
- Mathematically
- Price Elasticity of Supply = (% Change Quantities Supplied) / (% Change Price)
- as prices increase, suppliers are willing to produce and sell more

- Mathematically
- Incidence of Tax on Suppliers and Consumers
- Case 1: Elastic demand function
- the supplier takes on the higher burden

- Case 2: Inelastic demand function
- the consumer takes on more of the incidence of the tax by paying a higher price
- supplier has a relatively small reduction in quantities supplied

- Case 1: Elastic demand function

- Ultimate Question

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Aboukhadijeh, Feross. "Chapter 5: Applications of Demand and Supply- Elasticity" StudyNotes.org. Study Notes, LLC., 12 Oct. 2013. Web. 29 Sep. 2020. <https://www.apstudynotes.org/microeconomics/outlines/chapter-5-applications-of-demand-and/>.