ELASTICITY

Elasticity
A measure of responsiveness of
quantity
demanded
or
quantity
supplied to a change in one of its
determinants

Price Elasticity of
Demand
A measure of how much the quantity
demanded of a good responds to a
charge in the price of that good,
(computed
as the percentage
change
in
quantity
demanded
divided by the percentage change in
price)

What influences elasticity of

demand?

Availability of close substitutes

Necessities versus Luxuries
Definition of the Market
Time Horizon

Computation of Price Elasticity

of Demand
The Percentage Method

The Midpoint Method

The Variety of Demand

Curves

=0

Perfectly Inelastic
Demand

Quantity demanded does

not respond to price
changes

<1

Inelastic Demand

Quantity demanded does

not respond strongly to
price change

=1

Unit Elastic Demand

Quantity demanded
changes by the same
percentage as the price

>1

Elastic Demand

Quantity demanded
responds strongly to
change in price

Perfectly Elastic
Demand

Quantity demanded
changes infinitely with any
change in price

Total Revenue and the Price

Elasticity of Demand
Total revenue= the amount paid by buyers
and received by sellers of a good.
Formula:

How Total Revenue Changes

when Price Changes?
Inelastic an increase in the price leads to a
decrease
in
quantity
demanded
that
is
proportionately smaller; total revenue increases.
Elastic - increase in the price leads to a decrease
in quantity demanded that is proportionately
larger; total revenue decreases.
Unit elastic - total revenue remains constant.

Elasticity and Total Revenue along a Linear

Curve

Slope defined as rise over run

RISE ratio of the change in price
RUN the change in quantity

OTHER DEMAND ELASTICITIES

Income Elasticity of Demand
- measures how the quantity
demanded changes as consumer
income changes

 Normal Goods
demand rises as income rises and vice
versa
have POSITIVE (+) income elasticity of
demand

 Inferior Goods
demand falls as income rises and vice versa
have NEGATIVE (-) income elasticity of demand

NEGATIVE INCOME ELASTICITY OF DEMAND

 Cross-Price Elasticity of Demand

measures how the quantity demanded
of one good responds to a change in the
price of another good

 Substitutes
goods that can be used in exchange for one
another
good's demand is increased when the price of
another is increased and vice versa
have a positive cross-price elasticity

 Compliments
goods that people tend to consume hand in hand
good's demand is increased when the price of
another good is decreased and vice versa
with a negative cross-price elasticity of demand

NEGATIVE CROSS-PRICE ELASTICITY

The Price Elasticity of

supply and its
determinants

 The price elasticity of supply measures

how much the quantity supplied
responds to a changes in the price.

FORMULA:
Percentage change in
quantity supplied

PES =
--------------------------------------------------Percentage change in price

 Percentage change in quantity

supplied
(25.00-15.00)/20.00 x 100 = 75%

Percentage change in price

(15.00 10.00) / 25.5 x 100 = 40%
75 percent

Price elasticity of supply =

1.875 percent
40 percent

---------------- =

 Elastic if the quantity supplied

substantially responds to the changes
in the price.
Inelastic if the quantity supplied
responds only slightly to the changes
in the price
In most markets, a key determinant of
the price elasticity of supply is the
time period being considered.

The Variety of Supply

Curves

THANK YOU!