elasticity - measures how much curves change w/ respect to other curve
- percent change in 1 variable per 1 percent change in other variable, measures sensitivity
- independent to units that price/quantity are measured
- notice that the derivatives are w/ respect to P, not Q
- more elastic >> more reactive to changes
- perfectly elastic >> the smallest change could drive demand to 0
- less elastic >> less reactive to changes
- perfectly inelastic >> consumers willing to pay any price for good (ie drug addiction)
price elasticity of demand - E = %ΔQ / %ΔP = PdQ / QdP = (P/Q) (dQ/dP)
- dQ/dP = partial derivative of Q function w/ respect to P
- for arc elasticity, dQ/dP is a given average change
- normally calculated as point elasticity w/ derivatives
- elasticity of demand - usually negative number
- price increases >> quantity desired decreases, price decreases >> quantity desired increases
- availability of substitutes - primary determinant of price
- linear demand curve >> elasticity not constant, more elastic up top, near 0 at bottom
- constant elasticity demand function - takes away linear possibility (unrealistic)
- expenditure = Q x P >> d(exp) / dP = Q + P x dQ/dP = Q(1+elasticity)
- income elasticity of demand = I/Q x dQ/dI
- % that quantity changes w/ % income change
- luxuries = income elastic
- basic necessities = income inelastic
- cross-price elasticity of demand - same as elasticity of demand, but w/ different goods
- negative for complements (ie tires/cars)
- positive for substitutes
- perfectly elastic
- slightest price change will make demand go to 0
- obviously very responsive to price changes
- perfectly inelastic
- demand stays stable for any change in price
- obviously not at all responsive to price changes
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