Principles of Microeconomics Shomu Banerjee 5. Elasticities Emory University Spring 2013

Price elasticity of demand %∆ in quantity demanded %∆ in price e is always negative or zero |e| < 1: inelastic |e| > 1: elastic |e| = 1: unitary elastic

Incidence revisited (inelastic demand) Price Quantity 10 4 5 Supply Demand Effective supply 6 2 $3 Quantity 10 4 5 Supply Demand Effective supply 6 2 $3 Price

Incidence revisited (elastic supply) Price Quantity 10 3 5 Supply Demand Effective supply 6 2 $3 Price Quantity 10 3 5 Supply Demand Effective supply 6 2 $3

Pass-through The more inelastic the demand The more elastic the supply

Price elasticity and revenues 10 Demand 7 A 6 Midpoint B C 3 4 10 Quantity

Price elasticity and revenues 10 Demand Midpoint 4 A 3 B C 6 7 10 Quantity

Price elasticity and linear demand 10 Elastic range |e| = 1 Inelastic range Demand |e| = 0 10 Quantity

Income elasticity of demand ei = %∆ in quantity demanded %∆ in income ei could be negative, zero or positive ei < 0: inferior good ei > 0: normal good

Cross-price elasticity of demand exy = %∆ in quantity demanded of x %∆ in price of y exy > 0: x and y are substitutes exy < 0: x and y are complements exy = 0: x and y are unrelated