Elasticity and its Application PDF

N. Gregory Mankiw Principles of Microeconomics Sixth Edition 5 Elasticity and its Application...

N. Gregory Mankiw Principles of Microeconomics Sixth Edition 5 Elasticity and its Application Premium PowerPoint Slides by © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ron  In this chapter, look for the answers to these questions: What is elasticity? What kinds of issues can elasticity help us understand? What is the price elasticity of demand? How is it related to the demand curve? How is it related to revenue & expenditure? What is the price elasticity of supply? How is it related to the supply curve? What are the income and cross-price elasticities of demand? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  A scenario… You design websites for local businesses. You charge $200 per website, and currently sell 12 websites per month. Your costs are rising (including the opportunity cost of your time), so you consider raising the price to $250. The law of demand says that you won’t sell as many websites if you raise your price. How many fewer websites? How much will your revenue fall, or might it increase? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 3 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Elasticity  Basic idea: Elasticity measures how much one variable responds to changes in another variable.  One type of elasticity measures how much demand for your websites will fall if you raise your price.  Definition: Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its determinants. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 4 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity of Demand Price elasticity Percentage change in Qd = of demand Percentage change in P  Price elasticity of demand measures how much Qd responds to a change in P.  Loosely speaking, it measures the price- sensitivity of buyers’ demand. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 5 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity of Demand Price elasticity Percentage change in Qd = of demand Percentage change in P P Example: P rises Price elasticity P2 by 10% P1 of demand D equals 15% Q = 1.5 Q2 Q1 10% Q falls by 15% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 6 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity of Demand Price elasticity Percentage change in Qd = of demand Percentage change in P P Along a D curve, P and Q move in opposite directions, P2 which would make price elasticity negative. P1 We will drop the minus sign D and report all price Q elasticities as Q2 Q1 positive numbers. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 7 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Calculating Percentage Changes Standard method of computing the Demand for percentage (%) change: your websites P end value – start value x 100% start value B $250 A Going from A to B, $200 the % change in P equals D ($250–$200)/$200 = 25% Q 8 12 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 8 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Calculating Percentage Changes Problem: The standard method gives Demand for different answers depending your websites on where you start. P From A to B, B P rises 25%, Q falls 33%, $250 A elasticity = 33/25 = 1.33 $200 From B to A, D P falls 20%, Q rises 50%, Q elasticity = 50/20 = 2.50 8 12 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 9 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Calculating Percentage Changes  So, we instead use the midpoint method: end value – start value x 100% midpoint  The midpoint is the number halfway between the start and end values, the average of those values.  It doesn’t matter which value you use as the start and which as the end—you get the same answer either way! © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 10 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Calculating Percentage Changes  Using the midpoint method, the % change in P equals $250 – $200 x 100% = 22.2% $225  The % change in Q equals 12 – 8 x 100% = 40.0% 10  The price elasticity of demand equals 40/22.2 = 1.8 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 11 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 1 Calculate an elasticity Use the following information to calculate the price elasticity of demand for hotel rooms: if P = $70, Qd = 5000 if P = $90, Qd = 3000 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 1 Answers Use midpoint method to calculate % change in Qd (5000 – 3000)/4000 = 50% % change in P ($90 – $70)/$80 = 25% The price elasticity of demand equals 50% = 2.0 25% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  What determines price elasticity? To learn the determinants of price elasticity, we look at a series of examples. Each compares two common goods. In each example:  Suppose the prices of both goods rise by 20%.  The good for which Qd falls the most (in percent) has the highest price elasticity of demand. Which good is it? Why?  What lesson does the example teach us about the determinants of the price elasticity of demand? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 14 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 1: Breakfast Cereal vs. Sunscreen  The prices of both of these goods rise by 20%. For which good does Qd drop the most? Why?  Breakfast cereal has close substitutes (e.g., pancakes, Eggo waffles, leftover pizza), so buyers can easily switch if the price rises.  Sunscreen has no close substitutes, so consumers would probably not buy much less if its price rises.  Lesson: Price elasticity is higher when close substitutes are available. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 15 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 2: “Blue Jeans” vs. “Clothing”  The prices of both goods rise by 20%. For which good does Qd drop the most? Why?  For a narrowly defined good such as blue jeans, there are many substitutes (khakis, shorts, Speedos).  There are fewer substitutes available for broadly defined goods. (There aren’t too many substitutes for clothing, other than living in a nudist colony.)  Lesson: Price elasticity is higher for narrowly defined goods than broadly defined ones. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 16 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 3: Insulin vs. Caribbean Cruises  The prices of both of these goods rise by 20%. For which good does Qd drop the most? Why?  To millions of diabetics, insulin is a necessity. A rise in its price would cause little or no decrease in demand.  A cruise is a luxury. If the price rises, some people will forego it.  Lesson: Price elasticity is higher for luxuries than for necessities. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 17 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 4: Gasoline in the Short Run vs. Gasoline in the Long Run  The price of gasoline rises 20%. Does Qd drop more in the short run or the long run? Why?  There’s not much people can do in the short run, other than ride the bus or carpool.  In the long run, people can buy smaller cars or live closer to where they work.  Lesson: Price elasticity is higher in the long run than the short run. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 18 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Determinants of Price Elasticity: A Summary The price elasticity of demand depends on:  the extent to which close substitutes are available  whether the good is a necessity or a luxury  how broadly or narrowly the good is defined  the time horizon—elasticity is higher in the long run than the short run © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 19 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Variety of Demand Curves  The price elasticity of demand is closely related to the slope of the demand curve.  Rule of thumb: The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity.  Five different classifications of D curves.… © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 20 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  “Perfectly inelastic demand” (one extreme case) Price elasticity % change in Q 0% = = =0 % change in P 10% of demand D curve: P D vertical P1 Consumers’ price sensitivity: P2 none P falls Q Elasticity: by 10% Q1 0 Q changes by 0% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 21 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  “Inelastic demand” Price elasticity % change in Q < 10% = = 1 % change in P 10% of demand D curve: P relatively flat P1 Consumers’ price sensitivity: P2 D relatively high P falls Q Elasticity: by 10% Q1 Q2 >1 Q rises more than 10% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 24 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  “Perfectly elastic demand” (the other extreme) Price elasticity % change in Q any % = = = infinity % change in P 0% of demand D curve: P horizontal P2 = P1 D Consumers’ price sensitivity: extreme P changes Q Elasticity: by 0% Q1 Q2 infinity Q changes by any % © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 25 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  A few elasticities from the real world Eggs 0.1 Healthcare 0.2 Rice 0.5 Housing 0.7 Beef 1.6 Restaurant meals 2.3 Mountain Dew 4.4 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 26 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Elasticity of a Linear Demand Curve P The slope 200% of a linear $30 E = = 5.0 40% demand 67% curve is 20 E = = 1.0 67% constant, but its 40% 10 E = = 0.2 elasticity 200% is not. $0 Q 0 20 40 60 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 27 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity and Total Revenue  Continuing our scenario, if you raise your price from $200 to $250, would your revenue rise or fall? Revenue = P x Q  A price increase has two effects on revenue:  Higher P means more revenue on each unit you sell.  But you sell fewer units (lower Q), due to law of demand.  Which of these two effects is bigger? It depends on the price elasticity of demand. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 28 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity and Total Revenue Price elasticity Percentage change in Q = of demand Percentage change in P Revenue = P x Q  If demand is elastic, then price elast. of demand > 1 % change in Q > % change in P  The fall in revenue from lower Q is greater than the increase in revenue from higher P, so revenue falls. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 29 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity and Total Revenue Elastic demand increased Demand for (elasticity = 1.8) P revenue due your websiteslost to higher P revenue If P = $200, due to Q = 12 and $250 lower Q revenue = $2400. $200 If P = $250, D Q = 8 and revenue = $2000. When D is elastic, Q 8 12 a price increase causes revenue to fall. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 30 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity and Total Revenue Price elasticity Percentage change in Q = of demand Percentage change in P Revenue = P x Q  If demand is inelastic, then price elast. of demand < 1 % change in Q < % change in P  The fall in revenue from lower Q is smaller than the increase in revenue from higher P, so revenue rises.  In our example, suppose that Q only falls to 10 (instead of 8) when you raise your price to $250. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 31 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity and Total Revenue Now, demand is increased Demand for inelastic: revenue due your websites elasticity = 0.82 P to higher P lost If P = $200, revenue due to Q = 12 and $250 lower Q revenue = $2400. $200 If P = $250, Q = 10 and D revenue = $2500. When D is inelastic, Q 10 12 a price increase causes revenue to rise. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 32 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 2 Elasticity and expenditure/revenue A. Pharmacies raise the price of insulin by 10%. Does total expenditure on insulin rise or fall? B. As a result of a fare war, the price of a luxury cruise falls 20%. Does luxury cruise companies’ total revenue rise or fall? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 2 Answers A. Pharmacies raise the price of insulin by 10%. Does total expenditure on insulin rise or fall? Expenditure = P x Q Since demand is inelastic, Q will fall less than 10%, so expenditure rises. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 2 Answers B. As a result of a fare war, the price of a luxury cruise falls 20%. Does luxury cruise companies’ total revenue rise or fall? Revenue = P x Q The fall in P reduces revenue, but Q increases, which increases revenue. Which effect is bigger? Since demand is elastic, Q will increase more than 20%, so revenue rises. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  APPLICATION: Does Drug Interdiction Increase or Decrease Drug-Related Crime?  One side effect of illegal drug use is crime: Users often turn to crime to finance their habit.  We examine two policies designed to reduce illegal drug use and see what effects they have on drug-related crime.  For simplicity, we assume the total dollar value of drug-related crime equals total expenditure on drugs.  Demand for illegal drugs is inelastic, due to addiction issues. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 36 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Policy 1: Interdiction Interdiction new value of drug- reduces the Price of related crime supply of Drugs S2 D1 drugs. S1 Since demand P2 for drugs is inelastic, initial value P1 P rises propor- of drug- tionally more related than Q falls. crime Result: an increase in Q2 Q1 Quantity total spending on drugs, of Drugs and in drug-related crime © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 37 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Policy 2: Education new value of drug- Education Price of related crime reduces the Drugs demand for D2 D1 drugs. S P and Q fall. P1 initial value Result: of drug- A decrease in P2 related total spending crime on drugs, and in drug-related Q2 Q1 Quantity crime. of Drugs © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 38 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity of Supply Price elasticity Percentage change in Qs = of supply Percentage change in P  Price elasticity of supply measures how much Qs responds to a change in P.  Loosely speaking, it measures sellers’ price-sensitivity.  Again, use the midpoint method to compute the percentage changes. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 39 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Price Elasticity of Supply Price elasticity Percentage change in Qs = of supply Percentage change in P P Example: S P rises Price by 8% P2 elasticity P1 of supply equals Q 16% Q1 Q2 = 2.0 8% Q rises by 16% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 40 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Variety of Supply Curves  The slope of the supply curve is closely related to price elasticity of supply.  Rule of thumb: The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity.  Five different classifications… © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 41 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  “Perfectly inelastic” (one extreme) Price elasticity % change in Q 0% = = =0 % change in P 10% of supply S curve: P S vertical P2 Sellers’ price sensitivity: P1 none P rises Q Elasticity: by 10% Q1 0 Q changes by 0% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 42 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  “Inelastic” Price elasticity % change in Q < 10% = = 1 % change in P 10% of supply S curve: P relatively flat S P2 Sellers’ price sensitivity: P1 relatively high P rises Q Elasticity: by 10% Q1 Q2 >1 Q rises more than 10% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 45 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  “Perfectly elastic” (the other extreme) Price elasticity % change in Q any % = = = infinity % change in P 0% of supply S curve: P horizontal P2 = P1 S Sellers’ price sensitivity: extreme P changes Q Elasticity: by 0% Q1 Q2 infinity Q changes by any % © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 46 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Determinants of Supply Elasticity  The more easily sellers can change the quantity they produce, the greater the price elasticity of supply.  Example: Supply of beachfront property is harder to vary and thus less elastic than supply of new cars.  For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 47 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 3 Elasticity and changes in equilibrium  The supply of beachfront property is inelastic. The supply of new cars is elastic.  Suppose population growth causes demand for both goods to double (at each price, Qd doubles).  For which product will P change the most?  For which product will Q change the most? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 3 Answers Beachfront property When supply (inelastic supply): is inelastic, P an increase in demand has a D1 D2 S bigger impact on price than P2 B on quantity. P1 A Q Q1 Q2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  ACTIVE LEARNING 3 Answers New cars When supply (elastic supply): is elastic, P an increase in demand has a D1 D2 bigger impact S on quantity than on price. B P2 A P1 Q Q1 Q2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  How the Price Elasticity of Supply Can Vary P Supply often S elasticity becomes $15 1 limits. 4 $3 Q 100 200 500 525 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 51 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Other Elasticities  Income elasticity of demand: measures the response of Qd to a change in consumer income Income elasticity Percent change in Qd = of demand Percent change in income  Recall from Chapter 4: An increase in income causes an increase in demand for a normal good.  Hence, for normal goods, income elasticity > 0.  For inferior goods, income elasticity < 0. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 52 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Other Elasticities  Cross-price elasticity of demand: measures the response of demand for one good to changes in the price of another good Cross-price elast. % change in Qd for good 1 = of demand % change in price of good 2  For substitutes, cross-price elasticity > 0 (e.g., an increase in price of beef causes an increase in demand for chicken)  For complements, cross-price elasticity < 0 (e.g., an increase in price of computers causes decrease in demand for software) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 53 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Cross-Price Elasticities in the News “As Gas Costs Soar, Buyers Flock to Small Cars” -New York Times, 5/2/2008 “Gas Prices Drive Students to Online Courses” -Chronicle of Higher Education, 7/8/2008 “Gas prices knock bicycle sales, repairs into higher gear” -Associated Press, 5/11/2008 “Camel demand soars in India” (as a substitute for “gas-guzzling tractors”) -Financial Times, 5/2/2008 “High gas prices drive farmer to switch to mules” -Associated Press, 5/21/2008 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 54 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  SUMMARY Elasticity measures the responsiveness of Qd or Qs to one of its determinants. Price elasticity of demand equals percentage change in Qd divided by percentage change in P. When it’s less than one, demand is “inelastic.” When greater than one, demand is “elastic.” When demand is inelastic, total revenue rises when price rises. When demand is elastic, total revenue falls when price rises. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  SUMMARY Demand is less elastic: in the short run; for necessities; for broadly defined goods; and for goods with few close substitutes. Price elasticity of supply equals percentage change in Qs divided by percentage change in P. When it’s less than one, supply is “inelastic.” When greater than one, supply is “elastic.” Price elasticity of supply is greater in the long run than in the short run. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  SUMMARY The income elasticity of demand measures how much quantity demanded responds to changes in buyers’ incomes. The cross-price elasticity of demand measures how much demand for one good responds to changes in the price of another good. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.