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elasticity - measures how much curves change w/ respect to other curve 

  • percent change in 1 variable per 1 percent change in other variable, measures sensitivity
  • independent to units that price/quantity are measured
  • notice that the derivatives are w/ respect to P, not Q
  • more elastic >> more reactive to changes
    • perfectly elastic >> the smallest change could drive demand to 0
  • less elastic >> less reactive to changes
    • perfectly inelastic >> consumers willing to pay any price for good (ie drug addiction)

price elasticity of demand - E = %ΔQ / %ΔP = PdQ / QdP = (P/Q) (dQ/dP) 

  • dQ/dP = partial derivative of Q function w/ respect to P
    • for arc elasticity, dQ/dP is a given average change
    • normally calculated as point elasticity w/ derivatives
  • elasticity of demand - usually negative number
    • price increases >> quantity desired decreases, price decreases >> quantity desired increases
    • availability of substitutes - primary determinant of price
    • linear demand curve >> elasticity not constant, more elastic up top, near 0 at bottom
  • constant elasticity demand function - takes away linear possibility (unrealistic)
    • expenditure = Q x P >> d(exp) / dP = Q + P x dQ/dP = Q(1+elasticity)
  • income elasticity of demand = I/Q x dQ/dI
    • % that quantity changes w/ % income change
    • luxuries = income elastic
    • basic necessities = income inelastic
  • cross-price elasticity of demand - same as elasticity of demand, but w/ different goods
    • negative for complements (ie tires/cars)
    • positive for substitutes


  • perfectly elastic
  • slightest price change will make demand go to 0
  • obviously very responsive to price changes


  • perfectly inelastic
  • demand stays stable for any change in price
  • obviously not at all responsive to price changes
Subject X2: 

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