Elasticity
A Brief Lesson by
Nancy Carter
Definition
• Elasticity is a measure of sensitivity. We use
the coefficient of elasticity to evaluate how
sensitive one variable is to the change in
another.
General Formulas
I suggest you learn the relationships and then worry about
formulae. There is a basic set you will use that adapt to all
types of elasticity.
The basic formulae you will use are
1. The midpoint formula for calculating percentage change
2. The formula for the coefficient of elasticity
Variables Used
Δ = Change
Y = Income
P = Price
Midpoint Formula
The Midpoint formula gives you a better measure of elasticity
It is the difference in values divided by the average as you move
from one point to the next.
Example:
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Coefficient of Elasticity Formula
The name of the type of elasticity tells you which variable goes in the numerator
and which in the denominator. The first variable in the name is the denominator
value and the last is the numerator value.
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Four Types of Elasticity
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Price Elasticity of Demand
Measures the sensitivity of Demand to a change in the price of the good.
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Midpoint
Coefficient
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Determinants of
Price Elasticity of Demand
Tastes and Preferences
Income
Number of Substitutes Available
Luxury versus Necessity
Time
Expectations
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Midpoint
Coefficient
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Ranges of Price Elasticity of Demand
If Є=0 Perfectly Inelastic
If Є<1 Relatively Inelastic
If Є=1 Unit Elastic
If Є>1 Relatively Elastic
If Є= ∞ Perfectly Elastic
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Midpoint
Coefficient
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Price Elasticity of Supply
Measures the sensitivity of Supply to a change in the price of the good.
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Midpoint
Coefficient
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Determinants of
Price Elasticity of Supply
Time is the only significant
determinant of the
Price Elasticity of Supply.
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Midpoint
Coefficient
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Ranges of Price Elasticity of Supply
If Є=0 Perfectly Inelastic
If Є<1 Relatively Inelastic
If Є=1 Unit Elastic
If Є>1 Relatively Elastic
If Є= ∞ Perfectly Elastic
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Midpoint
Coefficient
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Income Elasticity of Demand
Measures the sensitivity of Demand to a change in Income
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Midpoint
Coefficient
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Determinants of
Income Elasticity of Demand
Normal Good – Demand rises with Income
– Coefficient is Positive
Inferior Good – Demand falls as Income Rises
– Coefficient is Negative
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Midpoint
Coefficient
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Cross Price Elasticity of Demand
Measures the sensitivity of Demand to a price change of another good.
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Midpoint
Coefficient
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Complements – Items consumed together
– Coefficient will be Negative
Substitutes – Items consumed instead of
– Coefficient will be Positive
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Midpoint
Coefficient
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