Economy Essay No. 5: Elasticity Revision

"Elasticity Revision"

By Tom Binder

I figured it would be very useful to post a complete overview of the things we learned about elasticity so far. Not only for myself, but for other students as well. I hope you find it useful!

Elasticity equals responsiveness. That is the first thing you should learn about elasticity.

Until this moment, we have learned of four different kinds of elasticity. These four different kinds are the following:

1. Price elasticity of demand:

The price elasticity of demand describes the way that the demand alters as the result of a change in price. When the price of item/service A goes up and the demand for item/service A only decreases a tiny bit, we must say that the demand for item/service A is inelastic. When the price of item/service B goes up and the demand for item/service B decreases significantly, we must say that de demand for item/service B is elastic. When the demand does not respond at all to any change in price, we must say that the demand is perfectly inelastic. When the demand responds maximal to a change in price, we must say that the demand is perfectly elastic. Perfectly elastic & perfectly inelastic will, in a diagram, be shown as the following image (perfectly elastic on the top, perfectly inelastic on the bottom):

• Example of an elastic demand for an item/service: A second car, if the price goes up, you might not buy a second car.
• Example of an inelastic demand for an item/service: Oil, if the price goes up, we will still buy oil.

2. Price elasticity of supply:

The price elasticity of supply describes the way that the supply alters as the result of a change in price. When the price of item/service A goes down and the supply for item/service A only decreases a tiny bit, we must say that the supply for item/service A is inelastic. When the price of item/service B goes down and the supply for item/service B decreases significantly, we must say that de supply for item/service B is elastic. When the supply does not respond at all to any change in price, we must say that the supply is perfectly inelastic. When the supply responds maximal to a change in price, we must say that the supply is perfectly elastic. The same figures can be applied for perfect elasticity.

• Example of an elastic supply for an item/service: Footballs, if the price goes down, we might stop producing new footballs.
• Example of an inelastic supply for an item/service: Oil, if the price goes down, we will still keep digging for oil.

3. Income elasticity of demand:

The income elasticity of demand describes the way that the demand alters as the result of a change in income. When the income of people goes up and the demand for item/service A only decreases a tiny bit, we must say that the demand for item/service A is inelastic. When the income of people goes down and the demand for item/service B decreases significantly, we must say that de demand for item/service B is elastic. When the demand does not respond at all to any change in income, we must say that the demand is perfectly inelastic. When the demand responds maximal to a change in income, we must say that the demand is perfectly elastic.

• Example of an elastic demand for an item/service: Vacations, if your income goes down, you might not spend your money by going on vacation.
• Example of an inelastic demand for an item/service: Bread, if your income goes down, you will still keep buying bread.

4. Cross elasticity of demand:

Cross elasticity of demand is all about substitutes. The cross elasticity of demand describes the way that the demand alters as the result of available substitutes. When there are many suitable substitutes available for item/service A, let's say items/services B-Z, and the demand for item/service A only decreases a tiny bit, we must say that the demand for item/service A is inelastic. When there are many suitable substitutes available for item/service A, again let's take items/services B-Z, and the demand for item/service A decreases significantly, we must say that de demand for item/service A is elastic, as a possible result of substitutes. When the demand does not respond at all to any suitable available substitutes, we must say that the demand is perfectly inelastic. When the demand responds maximal to suitable available substitutes, we must say that the demand is perfectly elastic.

• Example of an elastic demand for an item/service: Apples, if you think bananas are a good substitute, you might switch!
• Example of an inelastic demand for an item/service: Grain, there are almost no substitutes for grain.