
Measure of the responsiveness of quantity
demanded or quantity supplied to one of its
determinants


Measure of how much quantity demanded
responds to a change in price
Can be computed as % change in quantity
demanded divided by % change in price
1.
2.
3.
4.
Availability of Close Substitutes: More
substitutes available, more elastic demand
is
Necessities vs. Luxuries: Necessities are less
elastic
Definition of the market: Narrowly defined
are more elastic than broadly defined ones
Time Horizon: Goods tend to be more
elastic over longer time periods
Put the following into its likely order from
most elastic to least elastic:
Beef
Salt
European Vacation
Steak
New Honda Accord
Dijon mustard

1.
2.
3.
4.
5.
6.
European Vacation
New Honda Accord
Steak
Dijon Mustard
Beef
Salt

Formula is:
Price Elasticity of Demand =
% Change in Quantity Demanded
% Change in Price
So… if the price of of ice cream rises by 10%
and quantity demanded falls by 20%
Price elasticity of demand = 2
1.
2.
3.
4.
5.
Good A, which has few if
any substitutes
Good A, which has many
substitutes
Good A, which is seen as
a necessity
Good A, which is defined
very broadly (like market
for soap)
None of the above
82%
9%
9%
0%
1
2
3
0%
4
5
1.
2.
3.
4.
5.
24
4
.25
2.25
1
92%
4%
0%
1
2
3.
4%
4.
0%
5







Eggs
Rice
Beef
Mountain Dew
Healthcare
Housing
Restaurant Meals


The elasticity is calculated by going from one
point to another on demand curve, which will
be different at different parts on curve
So, you get around it using midpoint method
Price Elasticity of Demand =
(Q2 – Q1)/{(Q1+Q2)/2}
(P2 – P1)/{(P1+P2)/2}
Rarely, need to use this – big idea is that you
use it to counteract differences in elasticities

Example:
Calculate Price Elasticity of Demand if the price
rises from $4 to $6 and the resulting quantity
demanded falls from 120 to 80

Answer = 1
Demand is elastic if elasticity is
greater than 1
 Demand is inelastic if elasticity is less
than 1
 Demand is unit elastic if elasticity is
exactly 1



Flatter the demand
curve, the greater
the price elasticity
of demand
The steeper the
curve, the smaller
the price elasticity
of demand

Perfectly Elastic
Perfectly Inelastic
1.
2.
3.
4.
5.
Percent of income
spent on a good
How the market is
defined
Time in which the
market is viewed
Number of
substitutes available
Change in income
1.
2.
3.
4.
5.
Is relatively elastic
Is perfectly inelastic
Is relatively inelastic
Is perfectly elastic
The answer cannot
be determined based
on the information
given
0%
1
0%
0%
2
3
0%
0%
4
5
1.
2.
3.
4.
5.
Toothpaste
Bottled Water
Pencils
Insulin
Granny Smith
apples
0%
1
0%
0%
2
3
0%
0%
4
5


1.
2.
3.
Total Revenue = Amount paid by buyers and
received by sellers of the good (P x Q)
Rules about TR as it relates to Elasticity
When demand is inelastic, price & total
revenue move in the same direction
When demand is elastic, price & total
revenue move in opposite directions
If demand is unit elastic, total revenue
remains constant as price changes

Slope is constant, but elasticity isn’t
Income Elasticity Demand =
% Change in Quantity Demanded
% Change in Income
Normal = positive income elasticity
Inferior = negative income elasticity
Necessities = small income elasticity
Luxuries = large income elasticity
Shows if goods are substitutes or complements
% Change in Quantity Demanded of Good 1
% Change in Price of Good 2
Substitutes = Positive Cross-Price Elasticity
Complements = Negative Cross-Price
% Change in Quantity Supplied
% Change in Price
Depends on flexibility of sellers to change the
amount of the good they produce
Time period is key determinant (more elastic in
long run)


Flat supply curves show more elasticity; more
vertical supply curve is more inelastic
Perfectly Inelastic = Vertical;
Perfectly Elastic = Horizontal