20. The Factors that Influence the Elasticity of Demand
The magnitude of the price elasticity of demand depends on:
The closeness of substitutes: The closer and more numerous the substitutes for a good or service, the more elastic the demand.
The proportion of income spent on the good: The greater the proportion of income spent on a good or service, the more elastic the demand.
The amount of time elapsed since the price change: The longer the time elapsed since the price change, the more elastic the demand.
21. Cross Elasticity of Demand
The cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or compliment, other things remaining the same.
The cross elasticity of demand is equal to:
The changes in the quantity demanded and the price are percentages of the average price and quantity demanded over the range of change.
The cross elasticity of demand is positive for substitutes and negative for complements.
Income Elasticity of Demand
The income elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the income, other things remaining the same.
The income elasticity of demand is equal to:
The changes in the quantity demanded and income are percentages of the average income and quantity demanded over the range of change.
The income elasticity of demand is positive for normal goods and negative for inferior goods.
If the income elasticity of demand is greater than 1, demand is income elastic and the good is a normal good. As income increases, the percentage of income spent on income elastic goods increases
If the income elasticity of demand is positive but less than 1, demand is income inelastic and the good is a normal good. As income increases, the percentage of income spent on income inelastic goods decreases.
If the income elasticity of demand is negative the good is an inferior good.
The table has some “real-life” income elasticities from the book.
Airline Travel |
5.82 |
Restaurant Meals |
1.61 |
Clothing |
0.51 |
Food |
0.14 |
23. Elasticity of Supply
The elasticity of supply measures how responsive suppliers are to a change in the price of the good..
The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain unchanged. The elasticity of supply is equal to:
Three Cases of Elasticity of Supply
Supply is perfectly inelastic if the elasticity of supply equals 0. In this case, the supply curve is vertical.
Supply is unit elastic if the elasticity of supply equals 1. In this case, the supply curve is linear and passes through the origin. If any supply curve is linear and passes through the origin, the supply is unit elastic; the slope of the supply curve is irrelevant.
Supply is perfectly elastic if the elasticity of supply is infinite. In this case, the supply curve is horizontal.
The table to the right has two points on the supply curve for pizza from a particular pizza parlor.
The percentage change in the quantity supplied is [(400 300) 350] 100 = 28.6 percent.
The percentage change in price is [($16 $14) $15] 100 = 13.3 percent.
Between these two points, the elasticity of supply is 28.6% 13.3% = 2.15.
Supply is elastic if the elasticity of supply exceeds 1.0, unit elastic if the elasticity of supply equals 1.0, and inelastic if the elasticity of supply is less than 1.0.
The table to the right has two points on the supply curve for pizza from a particular pizza parlor.
The percentage change in the quantity supplied is [(400 300) 350] 100 = 28.6 percent.
The percentage change in price is [($16 $14) $15] 100 = 13.3 percent.
Between these two points, the elasticity of supply is 28.6% 13.3% = 2.15.
Supply is elastic if the elasticity of supply exceeds 1.0, unit elastic if the elasticity of supply equals 1.0, and inelastic if the elasticity of supply is less than 1.0.