PRICE ELASTICITY OF

DEMAND AND SUPPLY

Lecture 2
  Elasticity: a measure of the responsiveness of quantity
demanded or quantity supplied to one of its determinants
 The responsiveness (or sensitivity) of consumers to a price
Elasticity change is measured by a product’s price elasticity of demand
 Elastic vs inelastic
  Availabilty of Close substitutes
 Necessities vs Luxuries
 Definition of Markets: Narrowly defined (more elastic) vs
Determinants Broadly defined (more inelastic)
of Elasticity  Time Horizon (long run vs short run)
 Proportion of income (higher the price of a good relative to
consumers’ incomes, the greater the price elasticity of demand)
  The degree of price elasticity of supply depends on how easily
—and therefore quickly—producers can shift resources
between alternative uses. The easier and more rapidly
producers can shift resources between alternative uses, the
greater the price elasticity of supply.
 The immediate market period is the length of time over which
Price Elasticity of producers are unable to respond to a change in price with a
change in quantity supplied.
Supply  The short run in microeconomics is a period of time too short
to change plant capacity but long enough to use the fixed-sized
plant more or less intensively.
 The long run in microeconomics is a time period long enough
for firms to adjust their plant sizes and for new firms to enter
(or existing firms to leave) the industry.