04 Elasticity

ELASTICITY OF DEMAND
AND SUPPLY
Elasticity
Elasticity is an economic concept that measures

responsiveness of one variable to changes in another
variable.
We will study:
- Price elasticity of demand
-Income elasticity of demand
-Cross elasticity of demand
-Price elasticity of supply
Copyright © 2016 Pearson Canada Inc.

Price Elasticity of Demand
The price elasticity of demand is a units-free measure of

the responsiveness of the quantity demanded of a good to
a change in its price when all other influences on buying
plans remain the same.
The Midpoint Method of Calculating Price Elasticity
It is the percentage change in the quantity demanded of a
good (% change in quantity) divided by the percentage
change in the price of the same good (% change in price).

Average Price and Quantity

By using the average price and average quantity, we get
the same elasticity value regardless of whether the price
rises or falls.
Percentages and Proportions
The ratio of two proportionate changes equals to the same
as the ratio of two percentage changes.

A Units-Free Measure
Elasticity is a ratio of percentages, so a change in the units
of measurement of price or quantity leaves the elasticity
value the same.
Minus Sign and Elasticity
The formula yields a negative value, because price and
quantity move in opposite directions.
But it is the magnitude, or absolute value, that reveals how
responsive the quantity change has been to a price
change.


The Main Factors That Influence the Elasticity of

Demand
The elasticity of demand for a good depends on:
 The closeness of substitutes
 The proportion of income spent on the good
 The time elapsed since a price change

Closeness of Substitutes
The closer the substitutes for a good or service, the more
elastic is the demand for the good or service.
Necessities, such as food or housing, generally have
inelastic demand.
Luxuries, such as exotic vacations, generally have elastic
demand.

Proportion of Income Spent on the Good

The greater the proportion of income consumers spend on
a good, the larger is the elasticity of demand for that good.
Time Elapsed Since Price Change
The more time consumers have to adjust to a price
change, or the longer that a good can be stored without
losing its value, the more elastic is the demand for that
good.

Elasticity Along a Linear

Demand Curve
The elasticity of demand
changes along a linear
demand curve.
At the midpoint of the
demand curve, demand is
unit elastic.

Total Revenue and Elasticity

The total revenue from the sale of a good or service
equals the price of the good multiplied by the quantity sold.
When the price changes, total revenue also changes.
A rise in price doesn’t always increase total revenue.
Offering buyers a discount doesn’t always increase total
revenue either.

The change in total revenue due to a change in price

depends on the elasticity of demand:
If demand is elastic, a 1 percent price cut
increases the quantity sold by more than 1 percent,
and total revenue increases.
If demand is inelastic, a 1 percent price cut
increases the quantity sold by less than 1 percent,
and total revenues decreases.
If demand is unit elastic, a 1 percent price cut increases
the quantity sold by 1 percent,
and total revenue remains unchanged.

Your Expenditure and Your Elasticity

 If your demand is elastic, a 1 percent price cut
increases the quantity you buy by more than 1 percent
and your expenditure on the item increases.
 If your demand is inelastic, a 1 percent price cut
increases the quantity you buy by less than 1 percent
and your expenditure on the item decreases.
 If your demand is unit elastic, a 1 percent price cut
increases the quantity you buy by 1 percent and your
expenditure on the item does not change.



More Elasticities of Demand
Income Elasticity of Demand

The income elasticity of demand measures how the
quantity demanded of a good responds to a change in
income, other things remaining the same.
The formula for calculating the income elasticity of
demand is

If the income elasticity of demand is greater than 0,

the good is a normal good.
If the income elasticity of demand is greater than zero but
less than 1, demand is income inelastic.
If the income elasticity of demand is greater than 1,
demand is income elastic.
If the income elasticity of demand is less than zero,

the good is an inferior good.

Cross Elasticity of Demand

The cross elasticity of demand is a measure of the
responsiveness of demand for a good to a change in the price of a
substitute or a complement, other things remaining the same.
The formula for calculating the cross elasticity is:
Percentage change in quantity demanded of good A
Percentage change in price of good B

The cross elasticity of demand for

 goods-substitutes is positive.
 goods-complements is negative.

Elasticity of Supply
The elasticity of supply measures the responsiveness of

the quantity supplied to a change in the price of a good,
when all other influences on selling plans remain the
same.
Calculating the Elasticity of Supply
The elasticity of supply is calculated by using the formula:
Percentage change in quantity supplied

Percentage change in price


The Main Factors That Influence the Elasticity of

Supply
The elasticity of supply depends on
 Resource substitution possibilities
 Time frame for supply decision

Resource Substitution Possibilities

The easier it is to substitute among the resources used to
produce a good or service, the greater is its elasticity of
supply.
Time Frame for Supply Decision
The more time passes after a price change, the greater
can be the elasticity of supply, depending on a good.
Short-run supply is usually inelastic.
Long-run supply is usually the most elastic.

Elasticity and Tax Incidence –
Who Pays Sales Taxes?

04 Elasticity

Uploaded by

Copyright:

Available Formats

04 Elasticity

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

04 Elasticity

Uploaded by

Copyright:

Available Formats

ELASTICITY OF DEMAND

Elasticity is an economic concept that measures

Copyright © 2016 Pearson Canada Inc.

The price elasticity of demand is a units-free measure of

Copyright © 2016 Pearson Canada Inc.

Average Price and Quantity

Copyright © 2016 Pearson Canada Inc.

Copyright © 2016 Pearson Canada Inc.

Copyright © 2016 Pearson Canada Inc.

The Main Factors That Influence the Elasticity of

Copyright © 2016 Pearson Canada Inc.

Copyright © 2016 Pearson Canada Inc.

Proportion of Income Spent on the Good

Copyright © 2016 Pearson Canada Inc.

Elasticity Along a Linear

Copyright © 2016 Pearson Canada Inc.

Total Revenue and Elasticity

Copyright © 2016 Pearson Canada Inc.

The change in total revenue due to a change in price

Copyright © 2016 Pearson Canada Inc.

Your Expenditure and Your Elasticity

Copyright © 2016 Pearson Canada Inc.

Copyright © 2016 Pearson Canada Inc.

Copyright © 2016 Pearson Canada Inc.

Income Elasticity of Demand

Copyright © 2016 Pearson Canada Inc.

If the income elasticity of demand is greater than 0,

If the income elasticity of demand is less than zero,

Copyright © 2016 Pearson Canada Inc.

Cross Elasticity of Demand

Copyright © 2016 Pearson Canada Inc.

The cross elasticity of demand for

Copyright © 2016 Pearson Canada Inc.

The elasticity of supply measures the responsiveness of

Percentage change in quantity supplied

Copyright © 2016 Pearson Canada Inc.

Copyright © 2016 Pearson Canada Inc.

The Main Factors That Influence the Elasticity of

Copyright © 2016 Pearson Canada Inc.

Resource Substitution Possibilities

Copyright © 2016 Pearson Canada Inc.

Copyright © 2016 Pearson Canada Inc.

You might also like