Prepared for MICROECONOMICS, Ms Bonfig
Notes Adapted from Krugman, Wells and Graddy “Essentials of Economics” Third Edition, 2013 and notes from
Dr. Julie Mueller

Elasticity is a measure of “price
responsiveness”
 If demand is elastic, the price elasticity of demand is
> 1 , or demand is responsive to change.
 If demand is inelastic, the price elasticity of demand
is < 1 , or demand is less responsive to price changes.
 If demand is unitary elastic,
the price elasticity of demand
= 1 , or the change in demand
is equal to the change in price.
Inelastic
Unitary
1
Elastic

The Price Elasticity of demand is
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

Where the % change in quantity demanded =

𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
X 100
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
And the % change in price =
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
X 100
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
Demand is…..
A. Unitary Elastic
B. Elastic
C. Inelastic
Demand is…..
A. Unitary Elastic
B. Elastic
C. Inelastic
Demand is…..
A. Unitary Elastic
B. Elastic
C. Inelastic
Availability of substitutes
1.

More substitutes = more elastic ; less substitutes = more inelastic
Whether the good is a necessity or a luxury
2.

Luxury good = elastic ; necessity good = more inelastic
Share of income spent on the good
3.

4.

Lower price = elastic ; higher price = inelastic
Time elapsed since the price change
More time = elastic ; less time = inelastic

Total Revenue is the total value of sales of a good or service.
 TR = Price X Quantity Sold

When a seller raises a price, two things happen
 A price effect—each unit sells at a higher price, ⇒ revenue increases
 A quantity effect—fewer units are sold, ⇒ revenue decreases

Which impact dominates?
 Elastic demand: QUANTITY effect dominates, and an increase in price results in a decrease in
revenue
 Inelastic demand: PRICE effect dominates, and an increase in price result in an increase in
revenue
 Unitary elastic: The effects perfectly balance, and an increase in price has no change in revenue
Gasoline prices increased from about $3.00 per gallon in
2010 to about $4.00 per gallon in 2012. Economists
1.Find the % change in the
have measured the short run elasticity of demand for
consumption of gasoline in the
gasoline to be about 0.25, and the long run elasticity of short run.
demand to be about 0.75.
2.Find the % change in the
• What is the predicted change in consumption of
consumption of gasoline in the
long run.
gasoline in the short run?
• What is the predicted change in consumption of
3.Find the relevant numerical
quantities for the horizontal axis
gasoline in the long run?
by finding the amount
• Draw and label a demand curve that reflects the
long run elasticity, assuming that at $3.00 per gallon, demanded at $4.00 per gallon
motorists in the US consume 10 million barrels of 4.Draw and label the demand
curve.
gasoline per day.
1. Find the % change in the consumption of gasoline in the short run.
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
X 100 = $1/$3 = 33%
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
= elasticity,
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
percent change in price =
so elasticity X % change in price = % change in quantity demanded
% change in quantity demanded = 0.25 x 33% = 8.33%
2. Find the % change in the consumption of gasoline in the long run.
0.75 * 33% = 25%
3. Find the relevant numerical quantities for the horizontal axis by finding the amount demanded at
$4.00 per gallon.
percent change in quantity demanded =
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
X 100
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
Rearranging the formula, we see
change in quantity demanded = % change in quantity demanded * initial /100
= 25 * 10 /100 = 2.5 million barrels
So the new quantity demanded equals 10-2.5 = 7.5 million barrels at a price of $4.
4. Draw and label the demand
curve.
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
% 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

The Price Elasticity of Supply is

Measures the responsiveness of quantity supplied to changes
in price
Perfectly elastic supply: When even
the smallest price changes will lead to
drastic changes in the quantity
supplied.
VS
Perfectly inelastic supply: When the
price elasticity is zero, such that
changes in the price have no effect
on the quantity supplied.
To be continued when we discusses taxes…