Week 6: Elasticity Fundamentals
I. Price Elasticity of Demand and Supply A. Price Elasticity of Demand Definition: Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. Formula: The formula for price elasticity of demand (PED) is: P E D = % Change in Quantity Demanded % Change in Price PE D = % Change in Price % Change in Quantity Demanded Interpretation of PED: P E D > 1 PE D > 1 : Elastic demand (sensitive to price changes) P E D < 1 PE D < 1 : Inelastic demand (insensitive to price changes) P E D = 1 PE D = 1 : Unitary elastic (percentage change in quantity demanded equals percentage change in price) Factors Influencing PED: - Availability of substitutes - Necessity vs. luxury - Definition of the market - Time horizon B. Price Elasticity of Supply Definition: Price elasticity of supply measures the responsiveness of quantity supplied to a change in price. Formula: The formul...