Lecture 2.4 a
Elasticity:
A Supplement
Price Sensitivity of Demand
• Economist use the (own) price elasticity of demand to
summarize how responsive quantity demanded is to
price
• Demand curves are not always linear; and
responsiveness can change with price
% change in Qd
elasticity 
% change in price
Demand Elasticity
Own-Price
• Always negative
– First law of demand
• Talk about it in absolute terms
– Less than |1| -> inelastic
– Equal to |1| -> unit elastic
– More than |1| -> (highly) elastic
Other Elasticity Measures
• 3 Major Types
– Own-price
• Measures the change in quantity demanded with a change in
the (own) good’s price
• Always negative (F.L.O.D)
• Always expressed in absolute value
– Cross-price
• Measures the change in quantity demanded with a change in
the price of a related good (e.g. complement or substitute)
– Complement (-) Substitute (+)
– Income
• Measures the change in quantity demanded with a change in
income
– Normal/superiors goods (+) Inferior goods (-)
What Affects the Magnitude
• Availability and closeness of substitutes
– “better/closer” substitute makes it to switch
– Results in either
• Greater movement along the demand curve (own)
• Greater shift of the demand curve (cross)
• Time
– More time to adjust, more options you can find
• Proportion of Income spent on the good
– Larger proportion -> more sensitive to changes in
Income
What Does the Magnitude of the
Elasticity Tell Us?
• Own-price
– Larger absolute value (|e| > 1)
• Large changes in Qd with small changes in price
– Close substitutes exist (pepsi/coke)
– Or much consumption is discretionary (micro-brews)
– Cross-price
• Large value (e >1)
– Close (or good) substitute for good exists
– Complements
• Large absolute value (|e| > 1)
• Consumption in fixed proportions
• Income
– >1 superior (luxury?) good
– >0 normal
– < 0 inferior (Animal beer)