Microeconomics

Elasticity
1) Price elasticity
Price elasticity of demand = percentage change in quantity demanded = % ∆Q
percentage change in the price % ∆P
Percentage change = change in value = ending value – beginning value
average value (ending value + beginning
value) 2
- Highly elastic demand (∆Q > ∆P)
- Relatively inelastic demand (∆Q < ∆P)
- Perfectly elastic demand ( if price increases then demand goes to zero) infinite
elasticity
- Perfectly inelastic demand (no change in demand tough there is a change in price)
zero elasticity

2) Factors affecting the elasticity of demand

- Availability & closeness of the substitute
- The relative amount of income spent on the good
- Time since the price changed

3) Cross elasticity
Cross elasticity of demand = percentage change in the demand of a product
percentage change in price of the substitute or
compliment
Note: cross elasticity for supplements is positive & that for compliments is negative

4) Income elasticity
Income elasticity of demand = percentage change in quantity demanded
Percentage change in income
Note: Inferior goods have negative income elasticity
Normal goods have positive income elasticity
(necessities = 0 to 1 & luxury goods = above 1)

5) Supply elasticity
Price elasticity of supply = percentage change in quantity supplied
Percentage change in price
Note: Perfectly inelastic supply = 0 & the graph is vertical
Perfectly elastic supply = 1 & the graph is vertical

Factors affecting supply elasticity:

- The available substitutes for resources (input) used to produce the goods
- The time elapsed since the price changed
a. Momentary supply
b. Short term supply
c. Long term supply