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Determinants –
Substitutability – the larger the number of substitute goods, the greater the price elasticity of demand.
Proportion of Income – the higher the price of the good relative to the consumers income, the greater the price
elasticity of demand.
Luxury or Necessity
The longer the time period under consideration the more elastic it is because people become more
sensitive to price. Also durability of goods affects this decision.
The short-run supply elasticity is more inelastic though Industrial producers are able to make some output
changes by having workers work overtime or by bringing on an extra shift.
The long-run supply elasticity is the most elastic, because more adjustments can be made over time and
quantity can be changed more relative to a small change in price. Extreme Cases
V. Cross Elasticity of demand refers to the effect of a change in a product’s price on the quantity demanded for another
product.
If cross elasticity is positive, then X and Y are substitutes; if negative, then they are complements; and if zero,
then they are unrelated, independent products.
VI. Income Elasticity of Demand refers to the percentage change in quantity demanded that results from some percentage
change in consumer incomes.
A positive number indicates a normal or superior good; a negative one indicates an inferior good.
Those industries that are income elastic will expand at a higher rate as the economy grows.
Since marginal utility decreases with quantity, the consumers will only buy more of it
if it were to cost less. Therefore the demand curve is downward sloping. If marginal
utility falls sharply with each successive unit of consumption demand is inelastic.
III. Utility Maximizing Rule – consumers should allocate their income so that each, even the last dollar, spent yields the
same amount of marginal utility. [Equilibrium]
1. When comparing utility for assorted goods, we compare their utility per dollar.
As long as one good provides more utility per dollar than another, the consumer will buy more of the
first good; as more of the first product is bought, its marginal utility diminishes until the amount of utility
per dollar just equals that of the other product.