1. How Responsive is Quantity Demanded/Supplied to
Lecture 2.4 Summer /15/2009
Elasticity
How Responsive is Quantity Demanded/Supplied to
Changes in Price

2. Types of Elasticities Generally 3 categories we are concerned about
Price elasticity
Own-price:
How quantity demanded changes with the (own) price
Cross-price
How quantity demanded changes with another (cross) good’s price changes
Income
How quantity demanded changes with a change in your income
Supply elasticity
How quantity supplied changes with a change in (own/market) price

3. Own-Price (Demand) Elasiticity
Economist use the (own) price elasticity of demand to summarize how responsive quantity demanded is to price
Demand curves are not always linear; and responsiveness can change with price

4. Demand Elasticity Own-Price
Always negative
First law of demand
Talk about it in absolute terms
Less than |1| -> inelastic
Not very price responsive
Equal to |1| -> unit elastic
% change in Qd = % change in price
More than |1| -> (highly) elastic
Very price responsive

5. Elasticity Measures 3 Major Types for Demand Own-price Cross-price
Measures the change in quantity demanded with a change in the (own) good’s price
Always negative (F.L.O.D)
Always expressed in absolute value (as it’s always negative)
Cross-price
Measures the change in quantity demanded with a change in the price of a related good (e.g. complement or substitute)
Complement (-) Substitute (+)
Income
Measures the change in quantity demanded with a change in income
Normal/superiors goods (+) Inferior goods (-)

6. What Affects the Magnitude of the Demand Elasticity
Availability and closeness of substitutes
“better/closer” substitute makes it to switch
Results in either
Greater movement along the demand curve (own)
Greater shift of the demand curve (cross)
Time
More time to adjust, more options you can find
Long-run elasticity > short-run
Proportion of Income spent on the good
Larger proportion -> more sensitive to changes in Income

7. What Does the Magnitude of the Elasticity Tell Us?
Own-price
Larger absolute value (|e| > 1)
Large changes in Qd with small changes in price
Close substitutes exist (pepsi/coke)
Or much consumption is discretionary (micro-brews)
Cross-price
Large value (e >1)
Close (or good) substitute for good exists
Complements
Large absolute value (|e| > 1)
Consumption in fixed proportions
Income
>1 superior (luxury?) good
>0 normal
< 0 inferior (Animal beer)