Elasticity Types

Understanding elasticity is key in AP Microeconomics. It shows how demand and supply react to price changes, income shifts, and the prices of related goods. This knowledge helps businesses and consumers make informed decisions in the marketplace.

1. Price Elasticity of Demand

   • Measures how much the quantity demanded of a good responds to a change in its price.
   • Calculated as the percentage change in quantity demanded divided by the percentage change in price.
   • Values greater than 1 indicate elastic demand, less than 1 indicate inelastic demand, and equal to 1 indicates unit elastic demand.

2. Price Elasticity of Supply

   • Measures how much the quantity supplied of a good responds to a change in its price.
   • Calculated similarly to demand elasticity, using percentage changes in quantity supplied and price.
   • A higher elasticity indicates that producers can easily adjust their output in response to price changes.

3. Income Elasticity of Demand

   • Measures how the quantity demanded of a good changes as consumer income changes.
   • Positive values indicate normal goods (demand increases with income), while negative values indicate inferior goods (demand decreases with income).
   • The magnitude of the elasticity indicates whether the good is a necessity (less than 1) or a luxury (greater than 1).

4. Cross-Price Elasticity of Demand

   • Measures how the quantity demanded of one good changes in response to a change in the price of another good.
   • Positive values indicate substitute goods (demand for one increases as the price of the other increases), while negative values indicate complementary goods (demand for one decreases as the price of the other increases).
   • Helps businesses understand market relationships between products.

5. Elastic Demand

   • Occurs when the quantity demanded changes significantly with a small change in price.
   • Typically associated with non-essential goods or those with many substitutes.
   • Businesses may lower prices to increase total revenue when demand is elastic.

6. Inelastic Demand

   • Occurs when the quantity demanded changes little with a significant change in price.
   • Common for essential goods with few substitutes, such as medications or basic food items.
   • Businesses can increase prices without significantly reducing total revenue.

7. Unit Elastic Demand

   • Occurs when the percentage change in quantity demanded is equal to the percentage change in price.
   • Total revenue remains constant when the price changes.
   • Important for understanding optimal pricing strategies.

8. Perfectly Elastic Demand

   • Represents a situation where any price increase results in the quantity demanded dropping to zero.
   • Typically seen in highly competitive markets with perfect substitutes.
   • Firms have no control over pricing and must accept the market price.

9. Perfectly Inelastic Demand

   • Represents a situation where quantity demanded remains constant regardless of price changes.
   • Common for essential goods with no substitutes, such as life-saving medications.
   • Firms can raise prices without affecting the quantity sold.