Definitions

1. Elasticity: The response of the demand or price of a good by the change in demand or price of another good

2. Price Elasticity of Demand:
•The change in quantity demanded because of the change in price.
•Equation to determine the Price Elasticity of Demand (PED): The Change in Percentage of Quantity/The Change in Percentage of Price
•Equation is very important because of the firms' concern with how much Total Revenue (TR) they would get if they had to change their prices.
•Demand is elastic if PED is greater than 1
•Demand is inelastic if 0<PED<1
•Demand is perfectly elastic if PED=1
•Demand is perfectly inelastic if PED=0

3. Income Elasticity of Demand:
•The change in demand of goods when consumers' income change
•Equation: Percentage Change in Quantity/Percentage Change in Income
•If the Income Elasticity of Demand (YED)>0, it is a normal good, meaning that the demand increases when consumers' income increases and vice versa.
•If YED<0, it is an inferior good, which is the demand of the good increases when the consumers' income decreases and vice versa.
•YED=0, the demand is not affected by the change in income.
•YED=1, the demand is proportionally affected by the change in income.

4. Cross Elasticity of Demand (XPE or CPE)
•Change of demand of one good to the change of price in a another.
•Equation: Percentage Change of Quantity of X/Percentage Change of Price of Y
•XPE<0, goods are substitutes
•XPE>0, goods are complements
•XPE=0, two goods are unrelated

5. Price Elasticity of Supply (PES)
•The change of quantity supplied when the price of the good changes.
•Equation: Percentage Changed of Quantity Supplied/Percentage Changed of Price
•PES>1, the supply is price elastic. Change in price leads to proportionately greater change in quantity.
•0<PES<1, the supply is inelastic. Change in price leads to proportionately smaller change in quantity.
•PES=1 is unit elastic.
•PES=infinity, perfectly elastic

Assumptions

1. Price Elasticity of Demand (PED)
•The number of closeness of Substitutes, elasticity of good will increase if there are many close substitutes to the good.
•The proportion of income spent on good, elasticity of the good will increase if consumers have to spent a significant amount of their income on it.
•The Time period involved, elasticity of the good will increase after a period of time of consumers adjusting their consumption of the good.
•Nature of the good, goods are very inelastic depending on how addictive they are (ex: cigarettes, alcohol, etc.)

2. Income Elasticity of Demand (YED)
•The degree of "necessity" of the good, luxury goods are elastic as consumers buy more of the goods as their income rises. Food is inelastic as it is a necessity for people to eat regardless of income.
•The living standards of the economy, one good could be elastic in a developing country and inelastic in a developed country because of the standard of living in of the country.

3. Price Elasticity of Supply (PES)
•Time Period, number of goods produced depends on short and long run time periods. No adjustments possible for short run. Adjustments are possible in the long run.
•Extent of excess capacity, if firm is below full capacity, they are operating at a greater price elasticity.
•Long or short time lags, the time it takes for the supply to adjust to the change in demand.
•Speed by costs rise, firms are more willing to expand with lower increases of marginal costs.