elasticity

Measure of responsiveness of demand, supply…

Price elasticity of demand

TR=PQ

P

QE

%

%

P

Q

D

Unit elastic, |E|=1

Inelastic range|E|<1

Elastic range, |E|>1

Elastic: |E|>1, |%Q|>|%P|, don’t increase PInelastic: |E|<1, ------ < ------, increase P

Arc elasticity

2

2

12

12

12

12

PPPP

QQQQ

E

Point elasticity (requires knowledge of demand’s functional form)Q = a – b PQ/Q)/(P/P) = (Q/P)(P/Q)E = - b (P/Q)

If demand variables are written in log form then:ln Q = a + b ln PThen differential leads to: dQ/Q = -b dP/P

Determinants of elasticity

• Availability of substitutes

• Fraction of income spent

• Time

Incentives and elasticity

• (bad) Private health insurance and moral hazard

• (good) commission structure of erealty.com

Other types of elasticity

- Income

- Cross-price

TR, MR and Demand

TR= PQ, MR=(TR)/Q

D

MR

|E|=1