1. Demand

1.1. Price Elasticity of Demand

1.1.1. What It Is

1.1.1.1. Elasticity Coefficient

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1.1.1.2. Price Elasticity of Demand

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  • The numerator is the rate of change in quantity demanded.
  • The denominator is the rate of change in price.

1.1.2. Calculation Methods

1.1.2.1. Point Elasticity

• Directly substitute the two points.
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• The calculated results differ because different calculation bases are used.

1.1.2.2. Arc Elasticity

• Calculate using the average of the two points.
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1.1.2.3. Arc Elasticity vs. Point Elasticity

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• When the price change is very small, point elasticity is more accurate.
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1.1.3. Types

• There are mainly two types: elastic and inelastic.
  • e > 1: elastic
    • 
  • e < 1: inelastic
  • e = 1: unit elastic
    • 
  • e = 0: perfectly inelastic
    • 
  • e = infinity: perfectly elastic
    • 
• For the same good, demand is elastic at a high price level and inelastic at a low price level.
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1.1.4. Factors Affecting Price Elasticity of Demand

• How necessary the good itself is
  • The more necessary it is, the smaller the elasticity.
• Degree of substitutability
  • The greater the substitutability, the greater the elasticity.
• The proportion of total expenditure or total income accounted for by the good
  • The higher the proportion, the greater the elasticity.
• Uses of the good
  • The more uses it has, the greater the elasticity.
• Breadth of the category
  • The broader the category, the smaller the elasticity.
• Length of time
  • In the short term, elasticity is small.

1.1.5. Use

• The more a purchase requires careful consideration, the greater its elasticity.
• Pricing
  • 
  • Elastic: set a low price.
  • Inelastic: set a high price.

1.2. Income Elasticity of Demand

1.2.1. What It Is

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• The percentage change in quantity demanded caused by a 1% change in consumer income.
• e > 0: normal goods
  • 0 < e < 1: necessities
  • e > 1: luxury goods
• e < 0: inferior goods

1.2.2. Use

• Determine the nature of a good
  • Whether it is a normal good or an inferior good.
• Compare differences in living standards between two different social groups
  • Both rural and urban households have washing machines. If rural e > 1 while urban 0 < e < 1, this indicates that urban living standards are higher than rural living standards.
• Adjust the export structure
  • If a country’s economy is prosperous, export goods with a large e.
  • Otherwise, export goods with a small e.
• Adjust the product structure in a timely manner
  • Same as above.

1.3. Cross Elasticity of Demand

1.3.1. What It Is

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  • exy: the change in demand for x caused by a change in the price of y.
  • eyx: the change in demand for y caused by a change in the price of x.

1.3.2. Use

• Classify goods
  • exy > 0: substitutes
  • exy < 0: complements
  • exy = 0: independent goods
• Help firms adjust industrial structure and product structure
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    • First case: all are substitutes; do not build.
    • Second case: all are complements; build.
    • Third case: two substitute relationships > one complementary relationship; decide according to the situation.
    • Fourth case: two complementary relationships > one substitute relationship; decide according to the situation.
• Set prices correctly
  • For example, if the elasticity of a razor handle is large, set a low price; if the elasticity of razor blades is small, set a high price.

2. Supply

2.1. Elasticity of Supply

2.1.1. What It Is

• The change in quantity supplied caused by a change in the price of a good.
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2.1.2. Calculation Methods

2.1.2.1. Point Elasticity

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2.1.2.2. Arc Elasticity

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2.1.3. Types

• e = infinity: perfectly elastic
  • 
• e = 0: perfectly inelastic
  • 
• e = 1: unit elastic
  • 
• e < 1: inelastic
• e > 1: elastic

2.1.4. Factors Affecting Elasticity of Supply

• Difficulty of producing the product
  • Products that are harder to produce have smaller supply elasticity.
• Magnitude of increases in production cost
  • If production costs increase substantially, supply elasticity is small.
• Scale of production
  • Large-scale production has smaller supply elasticity.
• Difficulty of derived supply
  • Derived supply: the supply of intermediate products such as raw materials, machinery and equipment, semi-finished products, and fuel used to produce final products. Put simply, it means raw materials.
  • The harder it is to obtain derived supply, the smaller the supply elasticity.
• Time factor
  • In the immediate period, supply elasticity is small.

2.1.5. Use

• A small boat is easier to turn -> e is large.