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PRESENTATION

Elasticity

Today, you will be able to explain the concept of elasticity and calculate it

Definition

Elasticity is a measure of responsiveness. It measures how much something changes when there is a change in one of the factors that determines it (price or income)

elasticity of demand

Elasticity of demand is a measure oI how much the demand for a product changes when there is a change in one of the factors that determine demand. There are three elasticities of demand to consider: I. Price elasticity of demand (PED) 2. Cross elasticity of demand (XED) 3. Income elasticity of demand (YED).

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'The perfectly inelastic demand curve (PED=infinity) is used to describe the case of highly addictive goods such as drugs, or goods whitout substitutes

Perfectly elastic demand curve: PED=0 It is used to describe the demand that a perfectly competitive firm faces

HOW TO OBTAIN IT

THINGS TO REMEMBER

1. Price elasticity always is negative 2. Price Inelastic goods have few substitutes 0<|E|<1 3. Price elastic goods have many substitutes |E|>1

types of goods based in income elasticity

Giffen and Veblen goods break the rule, they increase quantitiy consumed when the price goes up.

Normal Goods: They have a positive income elastcity. When you have more income, you buy more of this goods Inferior Goods: They have a negative income elasticity. When you have more income, you change this goods for others of better quality

A Veblen good is a good for which demand increases as the price increases due to its exclusive nature and appeal as a status symbol. Giffen goods are essential goods. Demand stays high when prices increase because there is no ready substitute for them.

types of goods based in cross price elasticity

Unrelated goods: They have a cross price elasticity of zero.

Subtitutes Goods: They have a positive cross price elastcity. As one price rises, demand for the other rises Complementary Goods: They have a negative cross price elasticity. As one price rises, demand for the other falls

Prove your understanding

Answe the following questions

QUESTIONS

Assume the price of apples increases from $20 to $25 and the quantity demanded falls from 10tons to 5 tons 1. Calculate the elasticity price of apples 2. ¿Is an elastic or inelastic demand? 3. Assume that the increase in the price of apples decreased the quantity demanded of vanilla ice cream. Are these 2 goods complementary or supplementary? 4. Assume that the increase in the price of apples increased the quantity demanded of peaches from 20 tons to 30 tons. Calculate cross price elasticity of demand 5. Assume instead that a 10% increase in income caused the quantity demanded of apples decreased from 10 tons to 8 tons. Calculate income elasticity of demand

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