Mr. Yamada’s Economics: Unit 2 – Microeconomics study guide, Section II: Elasticities
Price elasticity of demand (PED)
Definition
Formula
Possible range of values (Give a number or range of numerical values for the following):
Elastic PED > ___ Perfectly elastic PED = ___
Inelastic PED < ___
Unit elastic PED = ___
Perfectly inelastic PED = ___
Diagrams illustrating the range of values of elasticity:
Elastic demand Inelastic demand
P
0
P
Unit elastic demand
Q
Perfectly elastic demand
P
0 Q
0
Determinants of price elasticity of demand
• Number and closeness of substitutes
•
Necessity of the product
•
How broadly the product is defined
•
Time period considered
Q
P
0
Perfectly inelastic demand
P
0
Q
Q

Total revenue: How is it calculated?
Varying elasticity along a straight-line (linear) demand curve: Label the parts of the curve where demand is price elastic and where it is inelastic
P
10
5
0 5
Cross elasticity of demand (XED)
Definition
Formula
10 Q
Substitute goods: Is cross-price elasticity of demand positive or negative? Why?
Complementary goods: Is cross-price elasticity of demand positive or negative? Why?
Income elasticity of demand (YED)
Definition
Formula
Normal goods: Is income elasticity of demand positive or negative? Why?
Inferior goods: Is income elasticity of demand positive or negative? Why?

Price elasticity of supply (PES)
Definition
Formula
Possible range of values (Give a number or range of numerical values for the following):
Elastic
Inelastic
PES > ___
PES < ___
Perfectly elastic PES = ___
Perfectly inelastic PES = ___
Unit elastic PES = ___
Diagrams illustrating the range of values of elasticity:
Elastic supply Inelastic supply
P
0
P
Unit elastic supply
P
Q 0 Q
Perfectly elastic supply
P
0 Q
P
Perfectly inelastic supply
0 Q 0
Determinants of price elasticity of supply
• Flexibility of sellers (how much costs rise as output is increased)
•
Presence of close producer substitutes
•
Time period considered
1.
Short term
2.
Long term
Q

Applications of concepts of elasticity
PED and business decisions: the effect of price changes on total revenue
PED and taxation
Cross-elasticity of demand: relevance for firms
Significance of income elasticity for sectoral change (primary  secondary  tertiary) as economic growth occurs:
Kinds of goods/ services
Income elasticity Effect of growth on demand
Primary sector
Secondary sector
Tertiary sector
What significance does the table above have for Least Developed Countries (LDCs)?
Elasticities Song
(Sung to the tune of “Ode to Joy” from Beethoven’s ninth symphony)
Elasticities predict the impact of a change in price
P-E-D tells us how much more people will buy if price falls
P-E-S says just how much more goods firms will supply when prices rise
More income shifts our demand for normal goods positively (positively)