Elasticity . . .
Demand elasticity is a measure of how
much buyers respond to changes price,
income, and other things.
Supply elasticity is a measure of how
much sellers respond to changes in price
and other things.

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Flavors of elasticity
Price Elasticity of Demand
 Income Elasticity of Demand
 Advertising Elasticity of Demand
 Price Elasticity of Supply

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Price Elasticity of Demand
•
Price elasticity of demand:
• the percent change in quantity
demanded in response to a
percent change in price.
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Price Elasticity of Demand
Demand tends to be more elastic :
The
larger the number of close
substitutes.
• the longer the time period.
• the more narrowly defined the market.
 If the good is a luxury.
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Computing the Price Elasticity
of Demand: A First Approach
Price elasticity of demand 
Percentage change in quatity demanded
Percentage change in price
Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your price elasticity of demand is:
(8  10)
 100
 20 percent
10

 2
(2.20  2.00)
10
percent
100
2.00
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Computing the Price Elasticity
of Demand: Mid Point Method
(100 - 50)
Price
ED 
$5
4
Demand
(4.00 - 5.00)
(100  50)/2
(4.00  5.00)/2
67 percent

 -3
- 22 percent
Demand is price elastic
0
50
100
Quantity
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Perfectly Inelastic Demand
Qty demanded doesn’t respond to price
Price
Elasticity=0
Demand
$5
1. An
increase
in price... 4
Quantity
100
2. ...leaves the quantity demanded unchanged.
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Inelastic Demand
A large percent change in price  A small
percent change in quantity demanded
Elasticity < 1
Price
1. A 22% $5
increase
in price... 4
Demand
Quantity
90 100
2. ...leads to a 11% decrease in quantity.
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Unit Elastic Demand
Each 1% increase in price  a 1% decrease in
quantity demanded
Elasticity = 1
Price
1. A 22% $5
increase
in price... 4
Demand
Quantity
80
100
2. ...leads to a 22% decrease in quantity.
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Elastic Demand
Small increase in price  big decrease in
quantity demanded
Elasticity > 1
Price
1. A 22% $5
increase
in price... 4
Demand
Quantity
50
100
2. ...leads to a 67% decrease in quantity.
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Perfectly Elastic Demand
The smallest change in price  Huge
change in quantity demanded
Elasticity is INFINITE
Price
Demand
$4
At exactly $4, consumers will buy any quantity
…and they won’t pay a cent more
…they’ll buy something else if price rises at all.
Demand facing a competitive firm.
Quantity
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Price Elasticity and Total
Revenue
Total
revenue is the price of a good
multiplied by the quantity sold.
TR = P x Q
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Total Revenue: A Picture
Price
$4
P x Q = $400
(total revenue)
P
0
Q
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Demand
100
Quantity
Elasticity and Total Revenue
With
inelastic demand, an
increase in price leads to a
small decrease in quantity
demanded.
Total revenue increases
when price rises.
P x Q Increases when P rises
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Elasticity and Total Revenue
With
elastic demand, a small
increase in price leads to a big
decrease in quantity demanded.
otal revenue decreases
when price rises.
T
P x Q decreases when P rises
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Elasticity and Total Revenue:
Elastic Demand
Price
…leads to a decrease
in total revenue
from$200 to $100
Price
An increase in price
from $4 to $5...
$5
$4
Demand
Demand
Revenue = $200
0
50
Quantity
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Revenue = $100
0
20
Quantity
Income Elasticity of Demand
Quantity
demanded responds to
consumer income.
Income elasticity of demand:
percentage change in quantity
demanded divided by the percentage
change in income.
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Computing Income Elasticity
Income Elasticity =
of Demand
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Percentage Change
in Quantity Demanded
Percentage Change
in Income
Income Elasticity
- Types of Goods Necessities
are income inelastic
Examples: food, fuel, clothing, utilities,
medical care.
Luxuries
are income elastic.
Examples: sports cars, jewelry,
gourmet foods.
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•
Use the midpoint method to calculate your price elasticity of demand as
the price of compact discs increases from $8 to $10 if (i) your income is
$10,000, and (ii) your income is $12,000.
•
•
•
[(40 – 32)/36] / [(8-10)/9] = [2/9]/[2/9] = 1
[(50-45)/47.5]/ [(8-10)/9] = 10.5% / 22.2% = .47
Calculate your income elasticity of demand as your income increases
from $10,000 to $12,000 if (i) the price is $12, and (ii) the price is $16.
•
[(30 – 24)/27]/[(10-12)/11] = 22.2% / 18.2 % = 1.22
•
[(12 – 8)/10 ]/[(10-12)/11] = 40% / 18.2 % = 2.2
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Price Elasticity of Supply
Quantity
supplied responds to price.
Price elasticity of supply
the percentage change in quantity
supplied resulting from a percent
change in price.
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Computing the Price Elasticity
of Supply
The percentage change in quantity
supplied divided by the percentage
change in price.
Percentage Change in
Quantity Supplied
Elasticity of Supply =
Percentage Change
in Price
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Perfectly Inelastic Supply
Elasticity equals 0
Price
Supply
$5
1. An
increase
in price... 4
Quantity
100
2. ...leaves the quantity supplied unchanged.
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Inelastic Supply
Elasticity < 1
Price
Supply
1. A 22% $5
increase
in price... 4
Quantity
100 110
2. ...leads to a 9 ½ % increase in quantity supplied.
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Unit Elastic Supply
Elasticity equals 1
Price
Supply
1. A 22% $5
increase
in price... 4
Quantity
100
125
2. ...leads to a 22% increase in quantity.
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Elastic Supply
Elasticity > 1
Price
Supply
1. A 22% $5
increase
in price...
4
100
200 Quantity
2. ...leads to a 67% increase in quantity.
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Perfectly Elastic Supply
Elasticity equals infinity
Price
Supply
$4
At exactly $4,
producers will
supply any quantity.
Quantity
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Determinants of
Elasticity of Supply
Ability of sellers to change the amount they
produce
•
•
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
Time period
• Supply is more elastic in the long run
than in the short run.
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An Increase in Supply in the
Market for Wheat
Price of
Wheat
S1
$3
Demand
0
100
Quantity of Wheat
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An Increase in Supply in the
Market for Wheat
Price of
Wheat
1. When demand is inelastic,
an increase in supply...
S1
S2
2. ...leads $3
to a large
2
fall in
price...
Demand
0
100
110
Quantity of Wheat
3. ...and a proportionately smaller
increase in quantity sold. As a result,
revenue falls from $300 to $220.
Summary
Price
elasticity of demand measures
how much the quantity demanded
responds to changes in the price.
If a demand curve is elastic, total
revenue falls when the price rises.
If it is inelastic, total revenue rises as
the price rises.
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Summary
The
price elasticity of supply measures
how much the quantity supplied
responds to changes in the price.
In most markets, supply is more elastic
in the long run than in the short run.
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Graphical
Review
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Computing the Price Elasticity
of Demand
(100 - 50)
Price
ED 
$5
4
Demand
(4.00 - 5.00)
(100  50)/2
(4.00  5.00)/2
67 percent

 -3
- 22 percent
Demand is price elastic
0
50
100
Quantity
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Elasticity and Total Revenue:
Inelastic Demand  Qd doesn’t
change much when price rises
Price
Price
An increase in price
from $1 to $3...
…leads to an increase
in total revenue
from$100 to $240
$3
Revenue = $240
$1
0
Demand
Revenue = $100
100
Quantity
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Demand
0
80
Quantity
Elasticity and Total Revenue
Elastic Demand  Qd changes
a lot when price rises
Price
…leads to a decrease
in total revenue
from$200 to $100
Price
An increase in price
from $4 to $5...
$5
$4
Demand
Demand
Revenue = $200
0
50
Quantity
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Revenue = $100
0
20
Quantity
Perfectly Inelastic Supply
- Elasticity equals 0
Price
Supply
$5
1. An
increase
in price... 4
Quantity
100
2. ...leaves the quantity supplied unchanged.
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Inelastic Supply
- Elasticity is less than 1
Price
Supply
1. A 22% $5
increase
in price... 4
Quantity
100 110
2. ...leads to a 10% increase in quantity.
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Unit Elastic Supply
- Elasticity equals 1
Price
Supply
1. A 22% $5
increase
in price... 4
Quantity
100
125
2. ...leads to a 22% increase in quantity.
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Elastic Supply
- Elasticity is greater than 1
Price
Supply
1. A 22% $5
increase
in price...
4
100
200 Quantity
2. ...leads to a 67% increase in quantity.
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