Chapter
5 Elasticity Of Demand
5.1 Introduction
Demand elasticities are measures of the responsiveness of _________ __________ to
changes in its own price, in income, in prices of other goods.
5.2 Price Elasticity of Demand [Ed(p)]
It is the responsiveness of Qd of a good to a change in its own _________ .
Ed(p) = ---------------------------
Exercise 1
1. Is price elasticity of demand positive or negative ? Why ?
2. If the price of both CD and VCD falls from $60 to $50, the sale of VCD rises by
200 discs while CD by 100 only. Can we say the price elasticity of demand of
VCD is greater than that of CD ? Why ?
A. Calculating the elasticity of demand
1. The original price and quantity method ( __________ elasticity)
Ed(p) =
E.g. When P rises from $3 to $4, Qd falls from 14,000 to 12,000
Ed(p) =
However, when the deirection of price movement is reversed 
Ed(p) =
It is the weakness of this method.
2. The average price and quantity method ( __________ elasticity)
Ed(p) =
B. Graphic measure of elasticity
∵we consider the % change in Qd and P of a good not the absolute change∴
we do not just consider the ___________ of demand curve but also the original
Qd and P.
From △Qd/△P x P/Qd , we get
-----------------------Refer to the figure below, the elasticity at point T is then =
P
P2 D
P1
T
0
Q1
Q
Exercise 2
Which of the following demand curves (D1 or D2) is more elastic ?
(a)
D1
(b)
D2
D1
D2
(c)
D1
D2
C. Price elasticity along a linear demand curve and types of price elasticity
1. At mid-point M
P
/D
2. At the vertical intercept D
/M
3. At the horizontal intercept D’
4. Between D and M
0
D’
Q
5. Between M and D’
D. Price elasticity, total revenue and marginal revenue
1. Ed(p) > 1 (elastic) Ed(p) > 1
%△Qd > / < / = %△P
 if P falls, PQ ↑/↓/ being unchanged i.e., TR ↑/↓/ being unchanged
if P rises, PQ ↑/↓/ being unchanged i.e., TR ↑/↓/ being unchanged
 MR is positive / negative / zero
2. Ed(p) < 1 (inelastic)
%△Qd > / < / = %△P
 if P falls, PQ ↑/↓/ being unchanged i.e., TR ↑/↓/ being unchanged
if P rises, PQ ↑/↓/ being unchanged i.e., TR ↑/↓/ being unchanged
 MR is positive / negative / zero
3. Ed(p) = 1 (unitarily elastic)
%△Qd > / < / = %△P
 if P falls, PQ ↑/↓/ being unchanged i.e., TR ↑/↓/ being unchanged
if P rises, PQ ↑/↓/ being unchanged i.e., TR ↑/↓/ being unchanged
 MR is positive / negative / zero
Exercise 3
Put the information you’ve got from part C and D into the following graph.
P
D=AR
0
Q
MR
E. Factors affecting price elasticity
1. Availability of substitutes
- more substitutes  Ed(p) would be _______________
- goods that are habit forming  Ed(p) would be _____________
2. Degree of necessity
- daily necessities, e.g. water  Ed(p) is ____________
3. Proportion of expenditure in total expenditure
- goods that take up a large proportion in total expenditure  when
P falls, increase in income is __________  __________ increase
in Qd (income effect)  Ed(p) is _____________
4. Price range
- high-price range  Ed(p) is _____________ (not for a
constant-elasticity D curve)
5. Adjustment time
- it takes time to react to changes in P and switch to other substitutes
 longer time, ____________ elastic (second law of demand)
6. Durability
- more durable goods  ___________ elastic
∵when P rises, consumers can keep their old ones and postpone the
purchase of the new ones
5.3 Income Elasticity of Demand [Ed(i)]
It is the responsiveness of Qd of a good to a relative change in _____________ .
Ed(i) = -------------------------------
Exercise 4
1. Price elasticity is negative, then how about income elasticity ?
Ans. (a) Superior / normal goods
(b) Inferior goods
2. Is it possible for all the goods in an economy to be luxuries ?
5.4 Cross Price Elasticity of Demand [Ed(xy)]
It is the relative responsiveness of a change in Qd of a good to a relative change in
the ____________ of some other goods.
Ed(xy) = ---------------------------------
1. Substitutes
An increase in the P of one will encourage ________ use of the other 
direction of change of the 2 variables is the same  ____________ Ed(xy)
2. Complements
An increase in the P of one will ______________ the use of the other 
_____________ Ed(xy)
**THE END**