Economics Chapter 4: Elasticity

Study Notes

Price Elasticity of Demand: measures responsiveness of quantity demanded to changes in price, expressed as a percentage change in quantity demanded in response to a 1% change in price.
Formula: ε = (percentage change in quantity demanded) / (percentage change in price)
Elastic demand: ε > 1 (quantity demanded responds strongly to price changes)
Inelastic demand: ε < 1 (quantity demanded responds weakly to price changes)
Unit elastic demand: ε = 1 (quantity demanded responds equally to price changes)

Hypothesis: Luxury tax on yachts over $100,000 would yield $31 million in tax revenue
Actual tax revenue: $16.6 million (people bought yachts outside the US to avoid the tax)

measures responsiveness of quantity demanded of good A to changes in the price of good B
Sign of cross-price elasticity shows the relationship between the goods
- Complements: negative cross-price elasticity
- Substitutes: positive cross-price elasticity

measures responsiveness of quantity supplied to changes in price
Formula: ε = (percentage change in quantity supplied) / (percentage change in price)

Supply curve with a positive intercept: price elasticity of supply decreases as Q increases
Supply curve with a zero intercept: price elasticity of supply is 1.00### Perfectly Elastic Supply
A perfectly elastic supply means selling all units at a fixed price with no volume discounts.
The cost of production remains constant at $0.14 for all levels of quantity.
An example of this is a lemonade stand where the cost of production is $0.14.

Input flexibility leads to more elastic supply as resources can adapt to changes.
Mobility of inputs increases elasticity as resources can be moved to where they are needed.
The use of substitute inputs makes supply more elastic.

The supply of a product becomes inelastic if it relies on a single unique input with no alternatives.
Examples include sports stars, actors, and musicians who have unique talents.
Over time, producers can develop alternative production methods, making supply more elastic.

Elasticity of demand changes at each point on the demand curve.
The midpoint formula is used to calculate elasticity, taking into account average quantity and price.
The formula is: ε = ΔQ / [(QA + QB)/2] / ΔP / [(PA + PB)/2].
Using the midpoint formula provides a more stable solution.