Elasticity

PRICE ELASTICITY OF DEMAND

ELASTIC--Typically above equilibrium price:

When price increases and total revenue decreases the elasticity of demand is elastic

When price decreases and total revenue increases the elasticity of demand is elastic

When price increases or decreases and total revenue remains the same the elasticity of demand is unitary elastic

INELASTIC--Typically below equilibrium price:

When price increases and total revenue increases the elasticity of demand is inelastic

When price decreases and total revenue decreases the elasticity of demand is inelastic

Price Elasticity of Demand coefficient:

% change in the quantity of demand DIVIDED BY the % change in the price.

If the result is GREATER than 1=ELASTIC

If the result is LESS than 1=INELASTIC

If the result is EQUAL to 1=UNIT ELASTIC

Income Elasticity=

% change in quantity demanded/% change in INCOME

Negative result=inferior good Positive result=normal good

Cross Price elasticity=

% change in qty of X / % change in price of Y

Negative result=complementary goods Positive result=substitute goods

Price elasticity of supply=

% change in S / % change in P

If the result is GREATER than 1=ELASTIC

If the result is LESS than 1=INELASTIC