LECTURE 2.4
Elasticity
How Responsive is Quantity
Demanded/Supplied to
Changes in Price
Types of Elasticities
• Generally 3 categories we are concerned about
• Price elasticity
• Own-price:
• How quantity demanded changes with the (own) price
• Cross-price
• How quantity demanded changes with another (cross) good’s price changes
• Income
• How quantity demanded changes with a change in your income
• Supply elasticity
• How quantity supplied changes with a change in (own/market) price
Own-Price (Demand) Elasiticity
• 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
• Not very price responsive
• Equal to |1| -> unit elastic
• % change in Qd = % change in price
• More than |1| -> (highly) elastic
• Very price responsive
Elasticity Measures
• 3 Major Types for Demand
• 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 (as it’s always negative)
• 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 of the (OwnPirce) Demand Elasticity
• 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
• Long-run elasticity > short-run
• 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)