Price elastic demand: Ed>1 or the (%DQd) >(%DP). Consumers are price sensitive.Price inelastic demand: Ed <1 or the (%DQd) <(%DP). Consumers are not price
sensitive.Unit elastic demand:Ed=1 meaning the (%DQd) =(%DP).Perfectly inelastic:Ed=0. In this special case, the demand curve is vertical and there is
absolutely no response to a price change.Perfectly elastic:Ed=°. In this special case, the demand curve is horizontal meaning con-
sumers have an instantaneous and infinite response to a price change.Slope and elasticity:In general, the more vertical a good’s demand curve, the more inelas-
tic the demand for that good. The more horizontal a good’s demand curve, the more elas-
tic the demand for that good. Despite this generalization, be careful, as elasticities and
slopes are notequivalent measures.Determinants of elasticity:If a good has more readily available substitutes (luxuries vs.
necessities), it is likely that consumers are more price elastic for that good. If a high propor-
tion of a consumer’s income is devoted to a particular good, consumers are generally more
price elastic for that good. When consumers have more time to adjust to a price change,
their response is usually more elastic.Total revenue:TR =P ¥QdTotal revenue test:Total revenue rises with a price increase if demand is price inelastic and
falls with a price increase if demand is price elastic.Elasticity and demand curves:At the midpoint of a linear demand curve, Ed=1. Above
the midpoint demand is elastic and below the midpoint demand is inelastic.Income elasticity:A measure of how sensitive consumption of good X is to a change in the
consumer’s income.Income elasticity formula:EI=(%DQdgood X )/(%Dincome)Luxury:A good for which the income elasticity is greater than one.Necessity:A good for which the income elasticity is above zero but less than one.Values of Income Elasticity:If EI>1, the good is normal and a luxury. If 1 >EI>0, the
good is normal and income inelastic (necessity). If EI<0, the good is inferior.Cross-price elasticity of demand:A measure of how sensitive consumption of good X is
to a change in the price of good Y.Cross-price elasticity formula:Ex,y=(%DQdgood X)/(%Dprice Y)Values of cross-price elasticity of demand:If Ex,y>0, goods X and Y are substitutes. If
Ex,y<0, goods X and Y are complementary.Price elasticity of supply:Measures the sensitivity of quantity supplied for good X when
the price of good X changes.Price elasticity of supply formula:Es=(%DQs)/(%DP)100 á Step 4. Review the Knowledge You Need to Score High
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