
Price elasticity of demand
 a unitsfree measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers' plans remain the same
 Price elasticity of demand = % change in quantity demanded / % change in price ... use absolute value so ignore the minus sign
 % change in quantity demanded = (Orginal quant.  New quant.) / average of old and new quant.
 % change in price = (Orginal price  New Price) / average of old and new price

Elasticity is a unitsfree measure because
the % change in each variable is independent of the units in which the variable is measured. The ratio of the 2 %s is a # without units.

Perfectly inelastic demand
 Quantity demanded is constant regardless of the price changes. The price elasticity of demand is 0.
 ex of good: low price elasticity of demand = insulin.

Unit elastic demand
if the % change in the quantity demanded equals the % change in price, then price elasticity = 1 and the good is said to have a unit elastic demand.

Inelastic demand
% change in the quantity demanded is less than the percentage change in price (price elasticity is between 0 and 1)

perfect elastic demand
 if the quantity demanded changes by an infinitely large % in response to a tiny price change, then the price elasticity of demand is infinity
 ex: soft drink machine located side by side

elestic demand
if % change in quantity demanded exceeds % change in price, the price elasticity of demand is greater than 1 and the good is said to have an elastic demand.

The change in total revenue depends on the elasticity of demand in the following ways:
  If demand is elastic: 1% price cut increases quantity sold by more than 1% & total rev. increase
  If demand is inelastic: 1% price cut increases quantity sold by less than 1% & total rev. decrease
  If demand is unit elastic: 1% price cut increases quantity sold by 1% & total rev. doesn't change

total revenue test
 is a method of estimating the price elasticity of demand by observing the change in total rev. that results from a change in the price, when all other influences on the quantitiy sold remain same
  price cut ^ total rev. demand = elastic
  price cut decrease total rev. demand = inelastic
  price cut leave total rev. unchange, demand = unit elastic

magnitude of the elasticity of demand depends on
  the closness of substitutes
  the proportion of income spent on the good = higher % of income a good cost the more elastic the demand
  the time elapsed since a price change = the more time that has passed the more elastic the demand

Cross Elasticity of Demand
 Measures the influence of a change in price of a subsitute or complement.
 Measure of the responsiveness of the demand for a good to a change in the rpice of a substitute or complement, other things remainig same
  cross elasticity of demand = % change in quantity demanded / % change in price of a substitute or complement
  positive for a substitute and negative for a complement
  the larger the cross elasticity of demand the greater the change in demand and the larger the shift in the demand curve
  if two items are not related then the cross elasticity is 0.

Income Elasticity of Demand
 Responsiveness of the demand for a good or service to a change in income, other things remaining the same.
  income elasticity of demand = % change in quantity demanded / % change in income
  Greater than 1 (normal good, income elastic) = as income ^, % of income spent on good ^
  Positive and less than 1 ( normal good, income inelastic) = as income ^, % of income spent on good decreases
  Negative (inferior good) = as income ^, % of income spent on good decreases

Elasticity of Supply
 Measures the responsiveness of the quantity supplied to a change in the price of a good when all the other influences on selling plans remain the same
  Elasticity of supply = % change in quantity supplied / % change in price
  No matter how steep the supply curve is , if it is linear and pases through the origin, supply is unit elastic

Magnitude of the elasticity of supply depends on
  Resource substitution possibilities = when good is produced in many countires or can be obtained easily then it is highly elastic.
  Time frame for the supply decision > momentary supply (response of quantitiy supplied immediately following price change)
 > longrun supply (response of quantitiy supplied to a change in price after all the technologically possible ways of adjusting supply have been exploited)
 > shortrun supply (the quantity supplied responds to a price change when only some of the technologically possible adjustments to production have been made) producers can control quantitiy supplied quickly

