6 elasticity[1]

Elasticities

• Price Elasticity – What happens when price goes up and down to demand in a product?

• Income Elasticity – What happens when somebody’s income goes up and down to a product?

• Cross Elasticity – What happens when a substitute or complementary good goes up and down to demand in your product?

Price Elasticity

What couldn’t you live without?

Price Elasticity

Price

Quantity

You will pay anything to drink….Which is why Governments control water supplies…Price inelastic!

Price Elasticity

Price

Quantity

If the price of a cup of coffee goes up too much you will not get it… You make a cup at home. This is Price elastic.

Price Elasticity

Price

Quantity

People are prepared to pay approximately $200 more than a standard tablet for an iPad. So the price is inelastic.

Calculating Price Elasticity

• Price is elastic if the answer is more than 1 • Inelastic if less than 1.• Ignore any – signs in the final answer.

Example Problem…

Yesterday, the price of envelopes was $3 a box, and Julie was willing to buy 10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic? What is Julie's elasticity of demand?

Solution

1. % Change in Quantity = (8 - 10)/(10) = -0.20 = -20%

2. % Change in Price = (3.75 - 3.00)/(3.00) = 0.25 = 25%

3. Elasticity = (-20%)/(25%) = -0.8 = 0.8

Price inelastic

Income Elasticity

What Happens if my wages go up?

Income Elasticity

Income Elasticityof Demand

% Change in Quantity Demanded

% Change in Income=

Cross Elasticity

Complementary Goods

Perfect Complements

Perfect complements Must be bought E.g. Pencil and eraser

Base good and complementary good E.G. The base good is a printer and the complementary good is the cartridges

Why would you price the base good low or high?

Substitute Goods

Cross Elasticity

% Change in Quantity Demanded% Change in Price of one of its

substitutes or complements

Positive = substitute goodsNegative = complementary

Cross Elasticity =