Demand Elasticities
Elasticity measures how responsive quantity demanded (Qd) is to a change in a variable that affects
quantity demanded by either movement along the demand curve (a change in the good’s own price) or
movement of the entire demand curve (Income, Price of a substitute or complement).
Demand is elastic if the percentage change in quantity demanded is greater than the percentage change
in the variable that we are analyzing, i.e., elasticity is > 1.
Demand is inelastic if the percentage change in quantity demanded is less than the percentage change
in the variable that we are analyzing, i.e., elasticity is < 1.
Demand is unit elastic if the percentage change in quantity demanded is equal to the percentage change
in the variable that we are analyzing, i.e., elasticity is = 1 (can happen at the mid-point of a linear
demand curve).
1. Own-price elasticity – how much Qd(x) changes when the good’s own price (Px) changes
 Always negative (<0) from first law of demand
 Magnitude of own-price elasticity affected by:
o Closeness and availability of substitutes
 More similar and numerous -> greater the change in Qd -> more elastic
 Proportion of Income/budget -> more sensitive when good takes up
bigger share of monthly income/budget -> more elastic
 More time to adjust -> find more ways to adjust -> greater the change in
Qd -> more elastic (short-run elasticity < long-run elasticity
2. Income elasticity
a. Can be either <0 (-) or >0 (+)
b. Negative Income Elasticity
i. < 0 -> good is called an “inferior” good
c. Positive Income Elasticity
i. > 0 -> good is called a “normal” good
1. Sub-categories of a normal good
a. Income elasticity between 0 and 1 -> necessity
i. % change in Qd < % change in Income
b. Income elasticity greater than 1 -> luxury
i. % change in Qd >% change in Income
3. Related goods (either substitutes or complements)
a. Substitutes – used in place of good X
i. Price of sub increases -> Qty demanded of X increases
1. Sign always positive for subs
2. If cross-price elas > 1 -> “really good” sub (close to perfect)
3. If cross-price elas 0 -> <1 -> adequate, but not great (not close)
b. Complements – used/consumed with good X
1. Sign always negative for complement
2. If cross-price |elas| > 1 -> always consumed with good X (close)
3. If cross-price |elas| 0 -> <1 -> sometime consumed with good X (not
close)