Review Notes - Elasticity

- Definition of 4 different types

- Price Elasticity of Demand (n)

- Price Elasticity of Supply (n_s)

- Income Elasticity of Demand (n_y)

- Cross Elasticity of Demand (n_x,y)

- Interpretation of size and sign of the elasticity coefficient for each type of elasticity.

- sign

-n < or = 0 always;

reflects the law of Demand (as P increases => Q_d decreases)

-n_s > or = 0 always;

reflects the law of Supply (as P increases => Q_s increases)

-n_y;

if n_y > 0 => as income increases, Q_d increases => the good is normal.

if n_y < 0 => as income increases, Q_d decreases => the good is inferior.

-n_x,y;

if n_x,y > 0 => as P_x increases Q increases => x and y are substitutes.

if n_x,y < 0 => as P_x increases Q decreases => x and y are complements.

if n_x,y = 0 => as P_x increases Q is constant => x and y are unrelated.

- size

-n;

if n > 1 => D is price elastic (% change in Q_d > % change in P).

if n < 1 => D is price inelastic (% change in Q_d < % change in P).

if n = 1 => D is unitarily elastic (% change in Q_d = % change in P).

relationship between price elasticity of demand and total revenue?

- when demand is elastic?

- when demand is inelastic?

- when demand is unitary?

- what causes a Demand curve to be more or less elastic?

-n_s;

if n_s > 1 => S is price elastic (% change in Q_s > % change in P).

if n_s < 1 => S is price inelastic (% change in Q_s < % change in P).

if n_s = 1 => S is unitarily elastic (% change in Q_s = % change in P).

-n_y;

if |n_y| > 1 => D is income elastic (|% change in Q_d| > |% change in Y|).

if |n_y| < 1 => D is income inelastic (|% change in Q_d| < |% change in Y|).

if n_y > 1 => the good is a luxury.

if 0 < n_y < 1 => the good is a necessity.

-n_x,y;

if n_x,y > 0 => as n_x,y increases x and y become closer substitutes.

if n_x,y < 0 => as n_x,y decreases (increases in absolute value) x and y become closer complements.

- Elasticity and taxes.

- when do consumers bear more of the burden of the tax?

- when do suppliers bear more of the burden of the tax?

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