ELASTICITY

Price Elasticity of Demand (Ed),

%∆𝑄𝑑/ 𝑄𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒
Use the absolute value of demand ,│Ed│= %∆𝑃/ 𝑃 𝐴𝑣𝑒𝑟𝑎𝑔𝑒
;

when P = price, Q = quantity demanded, Average= initial Q or P + new Q or P/2

If Ed > 1, Elastic demand

If Ed < 1, Inelastic demand

If Ed = 1, Unitary Elastic demand

If Ed = 0, Perfectly Inelastic demand

If Ed = ∞, Perfectly Elastic demand

Total Revenue (TR) and Elasticity, TR= P*Q

If the demand is Elastic: while the price increase; TR decreases

while the price decreases; TR increases

Negative relationship, (Luxury goods)

If the demand is Inelastic: while the price increase; TR increases

while the price decreases; TR decreases

Direct relationship, (Necessities goods)

%∆𝑸𝒅
Cross Elasticity of Demand* Don't use absolute value = %∆ 𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝒔𝒖𝒃𝒔𝒕𝒊𝒕𝒖𝒕𝒆 𝑶𝑹 𝒄𝒐𝒎𝒑𝒍𝒆𝒎𝒆𝒏𝒕

IF cross Ed > 1 (Positive); the good is a substitute

IF cross Ed < 1 (Negative); the good is a complement

%∆𝑸𝒅
Income Elasticity of Demand= %∆ 𝑰𝒏𝒄𝒐𝒎𝒆

If EI > 1 (Positive), Income Elastic demand (Normal good; Luxury goods)

If it's 0 < EI < 1, Income Inelastic demand (Normal good; Necessities goods)

If EI < 0 (negative), Income Inelastic demand (Inferior good)

%∆𝑸𝒔
Elasticity of Supply= %∆𝑷

If Es = 1, Unitary Elastic supply

If Es = 0, Perfectly Inelastic supply. e.g., Monetary supply.

If Es = ∞, Perfectly Elastic supply