Elasticity 1

ELASTICITY (PART 1)
HOW TO APPROACH THE STUDY OF

MICROECONOMICS
Microeconomics is the branch of economics that deals

with human behaviour and choices as they relate to
relatively small units: an individual, a firm, an
industry, a single market.
It involves players (consumers, business firms, and
factor owners) who have an objective, faces some
constraints and has to make choices.
Lets look at each of these players and what their

objective, constraints and choices are.
All the choices are made in market settings, with
different markets having different setups.
Players
Objective
Constraints
Choice
Consumers
Maximize
utility of
satisfaction by
consuming
goods and
services
Finite Incomes
Positive Prices
Chose between
different bundles
using marginal
analysis
Firms as
Buyers
Maximize profit
Positive Prices of
Chose mix of factors
Resources/Factors and that will minimize
cover opportunity costs cost using marginal
analysis
Firms as
Sellers
Maximize profit
-Consumers who wants Chose quantity to

to pay less for more
produce, sell and
-Competitors who will decide on price
undercut prices
Factor
Owners
Maximize
income earned
by selling
-Finite amount of
factor
-Market decides the
Chose to sell units of

factor based on
marginal analysis
ELASTICITY (PART 1)
Price
Elasticity of Demand: A measure of the
responsiveness of quantity demanded to changes
in price.
Measured by dividing the percentage change in
the quantity demanded of a good by the
percentage change in its price.
Coefficient of Price Elasticity of Demand. How do

we interpret this?
PRICE ELASTICITY OF DEMAND

Using percentage changes can at times lead to
conflicting results depending on whether price
falls or rises.
Economists compute price elasticity of demand
using midpoints as the base values of changes in
prices and quantities demanded
Numerically?
ELASTICITY IS NOT SLOPE

Point
Price
Quantity
Demanded
12
50
10
100
150
What is the Price Elasticity of Demand from Point A to

B?
What is the slope from A to B?
What is the Price Elasticity of Demand from Point B to
C?
What is the slope from B to C?
Are they the same?
ELASTIC DEMAND
The demand when the
percentage change in
quantity demanded is
greater
than
the
price.
Quantity
demanded
changes
proportionately
more
than the price.
%Qd > %P Ed > 1
Demand is elastic
INELASTIC DEMAND
The demand when the
less
than
the
price.
Quantity
demanded
changes
proportionately
less
than the price.
%Qd < %P Ed < 1
Demand is inelastic
UNIT ELASTIC DEMAND

The demand when the
equal to the percentage
change
in
price.
Quantity
demanded
changes proportionately
to the price.
%Qd = %P Ed = 1
Demand is unit
elastic
PERFECTLY ELASTIC DEMAND

CURVE
The demand when a

small percentage
change in price causes
an extremely large
quantity demanded
(from buying all to
buying nothing.)
Ed = (Infinitely
large)
PERFECTLY INELASTIC DEMAND

CURVE
The demand when the

quantity demanded does
not change as price
changes. So the demand
is
completely
UNRESPONSIVE
to
changes in demand.
Ed = 0
SUMMARIZING
PRICE ELASTICITY AND TOTAL

REVENUE (TOTAL EXPENDITURE)
Total Revenue of a seller equals the price of a good

tines the quantity of the good sold.
TR = P * Q
Question: Does rise in price mean higher revenue?

When prices increases Quantity demanded will
fall because Demand is downward sloping.
How does changes in prices impact total revenue?
Whether TR increases or decreases or remains
same, depends on whether percentage change in
quantity demand is less than, greater than or equal
to percentage change in price Price Elasticity of
Demand.
ELASTIC DEMAND AND TOTAL

REVENUE
Quantity
demanded
changes
proportionately
more than the price.
%Qd > %P Ed > 1
Demand is elastic
If price falls, Qd rises by a
bigger percentage Sales
of the good rises by a bigger
percentage TR revenue
rises.
If price rises, Qd falls by a
bigger percentage Sales
of the good falls by a bigger
falls.
INELASTIC DEMAND AND TOTAL

REVENUE
Quantity demanded changes
proportionately less than
the price.
%Qd < %P Ed < 1
Demand is inelastic
smaller percentage Sales
of the good rises by a
smaller percentage TR
revenue falls.
If price rises, Qd falls by a
smaller percentage Sales
of the good falls by a smaller
rises.
UNIT ELASTIC DEMAND AND TOTAL REVENUE

Quantity demanded changes
proportionately equal to
the price.
%Qd = %P Ed = 1
Demand is unit elastic
same percentage Sales of
the good rises by a same
stays same.
If price rises, Qd falls by the
same percentage Sales of
the good falls by same
stays same.
SUMMARIZING

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ELASTICITY (PART 1)

HOW TO APPROACH THE STUDY OF

Microeconomics is the branch of economics that deals

Lets look at each of these players and what their

-Consumers who wants Chose quantity to

Chose to sell units of

Coefficient of Price Elasticity of Demand. How do

PRICE ELASTICITY OF DEMAND

ELASTICITY IS NOT SLOPE

What is the Price Elasticity of Demand from Point A to

Are they the same?

UNIT ELASTIC DEMAND

PERFECTLY ELASTIC DEMAND

The demand when a

PERFECTLY INELASTIC DEMAND

The demand when the

PRICE ELASTICITY AND TOTAL

Total Revenue of a seller equals the price of a good

Question: Does rise in price mean higher revenue?

ELASTIC DEMAND AND TOTAL

INELASTIC DEMAND AND TOTAL

UNIT ELASTIC DEMAND AND TOTAL REVENUE

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