Elasticity A Brief Lesson by Nancy Carter. Definition Elasticity is a measure of sensitivity. We use...
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Transcript of Elasticity A Brief Lesson by Nancy Carter. Definition Elasticity is a measure of sensitivity. We use...
Definition
• Elasticity is a measure of sensitivity. We use the coefficient of elasticity to evaluate how sensitive one variable is to the change in another.
General Formulas
I suggest you learn the relationships and then worry about formulae. There is a basic set you will use that adapt to alltypes of elasticity.
The basic formulae you will use are
1. The midpoint formula for calculating percentage change
2. The formula for the coefficient of elasticity
Midpoint Formula
The Midpoint formula gives you a better measure of elasticityIt is the difference in values divided by the average as you movefrom one point to the next.
Example:
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Coefficient of Elasticity Formula
The name of the type of elasticity tells you which variable goes in the numerator and which in the denominator. The first variable in the name is the denominatorvalue and the last is the numerator value.
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Price Elasticity of Demand
Measures the sensitivity of Demand to a change in the price of the good.
Home Midpoint Coefficient ExitMenu
Determinants ofPrice Elasticity of Demand
Tastes and PreferencesIncomeNumber of Substitutes AvailableLuxury versus NecessityTimeExpectations
CoefficientMidpointHome ExitMenu
Ranges of Price Elasticity of Demand
Home Midpoint Coefficient ExitMenu
If Є=0 Perfectly InelasticIf Є<1 Relatively InelasticIf Є=1 Unit ElasticIf Є>1 Relatively ElasticIf Є= ∞ Perfectly Elastic
Price Elasticity of SupplyMeasures the sensitivity of Supply to a change in the price of the good.
CoefficientMidpointHome ExitMenu
Determinants ofPrice Elasticity of Supply
Time is the only significant determinant of the
Price Elasticity of Supply.
MidpointHome ExitMenu Coefficient
Ranges of Price Elasticity of Supply
CoefficientMidpointHome ExitMenu
If Є=0 Perfectly InelasticIf Є<1 Relatively InelasticIf Є=1 Unit ElasticIf Є>1 Relatively ElasticIf Є= ∞ Perfectly Elastic
Income Elasticity of Demand
Measures the sensitivity of Demand to a change in Income
CoefficientMidpointHome ExitMenu
Determinants of Income Elasticity of Demand
Normal Good – Demand rises with Income – Coefficient is Positive
Inferior Good – Demand falls as Income Rises – Coefficient is Negative
CoefficientMidpointHome ExitMenu
Cross Price Elasticity of Demand
Measures the sensitivity of Demand to a price change of another good.
CoefficientMidpointHome ExitMenu
Complements – Items consumed together – Coefficient will be Negative
Substitutes – Items consumed instead of – Coefficient will be Positive
CoefficientMidpointHome ExitMenu