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Brown Elasticity Cliff Notes

Price Elasticity of Demand : Ep = % in Quantity Demanded


% in Price
*This number will always be negative, so for this elasticity only, economists will only report the positive number.
The price elasticity of demand evaluates the percentage change in quantity demanded of a good as a result of a percentage
change in its price The price elasticity of demand tells us what !ind of elasticity a good has This is how responsive the
quantity demanded is to changes in the good"s price
#f Ep>1$ then the demand for the good is elastic This means quantity demanded changes %y a higher percentage than price
changes %y& or that the good"s quantity demanded is very sensitive to changes in the good"s price
#f Ep<1$ then the demand for the good is inelastic This means quantity demanded changes %y a lower percentage than price
changes %y& or that the good"s quantity demanded is not very sensitive to changes in the good"s price
#f Ep=1$ then the demand for the good is unit elastic This means quantity demanded changes %y the same percentage that
price changes %y
*Note this is the only elasticity we compare to 1 to determine if it is elastic, inelastic or unit elastic.
Income Elasticity of Demand : Ei = % in Quantity Demanded
% in #ncome
The income elasticity of demand evaluates the percentage change in quantity demanded of a good as a result of a percentage
change in consumer income The income elasticity of demand tells us what !ind of good we have
#f Ei>0$ then the good is normal This means quantity demanded changes in the same direction that income changes %y& or
that the good"s quantity demanded will increase as income increases and will decreases as income decreases
' special type of a normal good is a luxury ood ' lu(ury good is when Ei>1& or when the quantity demanded increases %y
more of a percentage than income increases %y
#f Ei<0$ then the good is inferior This means quantity demanded changes in the opposite direction that income changes %y&
or that the quantity demanded will increase if income decreases and will decrease if income increases
#f Ei=0$ then the good is unresponsi!e to income This means quantity demanded will not change as income changes
Cross"Price Elasticity of Demand : E(y = % in Quantity Demanded of )ood *
% in Price of )ood +
The cross,price elasticity of demand evaluates the percentage change in quantity demanded of one good as a result of a
percentage change in the price of a related good The cross,price elasticity of demand tells us the relationship %etween these
two goods
#f Exy>0$ then the goods are su#stitutes This means quantity demanded of )ood * changes in the same direction that the
Price of )ood + changes %y -r as the price of )ood + increases$ consumers will instead consume )ood * .i!ewise$ as the
price of )ood + decreases$ consumers will decrease the amount of )ood * they consume and will instead consume )ood +
#f Exy<0$ then the goods are complements This means quantity demanded of )ood * changes in the opposite direction
than the Price of )ood + -r as the price of )ood + increases$ consumers will consume less of )ood * %ecause )ood + and
)ood * /which are consumed together0 are now in total more e(pensive .i!ewise$ as the price of )ood + decreases$
consumers will increase the amount of )ood * they consume %ecause )ood * and )ood + in total are less e(pensive
#f Exy=0$ then the goods are unrelated to eac$ ot$er This means quantity demanded of )ood * is not affected %y price
changes of )ood +