Elasticity
What is Price Elasticity?
When you hear “Elasticity”… it
is referring to Price Elasticity
 Elasticity: A measure of the
responsiveness of Qd or Qs to a
change in Price
 There are four types of Elasticity you will need to
master for the AP Exam are:
 Price Elasticity of Demand
 Income Elasticity (of Demand)
 Cross Elasticity (of Demand)
 Price Elasticity of Supply
Price Elasticity of Demand
Ed = |%∆Qd / %∆P|
If Ed < 1
If Ed = 1
If Ed > 1
[Inelastic]
[Unit Elastic]
[Elastic]
*answer will naturally be a negative number (due to inverse
relationship)… so we take the absolute value to find Ed
Examples of Perfection?
Ed = 0
Ed = ∞
DETERMINANTS of DEMAND
Ed tends to be ELASTIC if…
 Substitutes are available
 Product price makes up a larger portion
of the consumer’s income
 The product is a luxury
 The consumer has adjustment time to
make changes in behavior, making the
product less necessary
Visualizing Elasticity
Relatively ELASTIC
Relatively INELASTIC
This type of visual comparison is only useful
when the scales are the same (otherwise
scales can change the look of a curve)
Income Elasticity
(of Demand)
EI = %∆Qd/ %∆Income
 If answer is positive:
 NORMAL good
 If answer is negative:
 INFERIOR good
Cross Elasticity
(of Demand)
Ex,y = %∆Qdx/ %∆Py
 If answer is positive:
 X and Y are SUBSTITUTES
 If answer is negative:
 X and Y are COMPLEMENTS
 If answer is zero:
 X and Y are UNRELATED
Price Elasticity of Supply
Es = %∆Qs / %∆P
If Es < 1
If Es = 1
If Es > 1
[Inelastic]
[Unit Elastic]
[Elastic]
*answer should never be less than zero
Elasticity of a Straight-Line
Demand Curve
 Use the following
data to construct a
correctly labeled
Demand Curve.
 Based on what you
know about
Elasticity… what is
the elasticity of this
product?
Price
Qd
6
5
4
3
2
1
.01
0
1
2
3
4
5
6
Total Revenue Test [TR=P*Q]
If price is decreasing
and total revenue is
increasing then the
product is ELASTIC
_________________
If price is decreases
and total revenue
decreases then the
product is INELASTIC
_________________
If price changes, but
total revenue stays
the same the product
is UNIT ELASTIC
Summary: Elasticity




Definition
Factors that determine Price Elasticity
How to calculate the 4 types of Elasticity
How elasticity affects relationships between
goods.
 Normal vs. Inferior Goods
 Compliment vs. Substitutes
 Using the Total Revenue Test
 Relationship between…
 TR, MR, and point of Ed=0 [preview for next unit]
Free Response Question
Once upon a time there was a college student who
had to stay up studying many nights in a row.
Soon the student had a caffeine addiction and
bought Starbucks coffee. He would buy 35 coffees
per semester at $2.00 each. When the student
came back in the spring he found coffee to now
be $3.00. Due to the income effect, he can no
longer afford as many coffees even though he is
addicted. He now only buys 20 coffees per
semester.
 1) Is the Ed elastic or inelastic for Coffee?
 2) Calculate the Ed for Coffee for this college
student
Multiple Choice
If the price of lunch at the school cafeteria
increases and the cafeteria’s total revenue
from lunches remains constant, we can
conclude that the elasticity of demand for a
school lunch is…
a) Elastic
b) Perfectly Elastic
c) Perfectly Inelastic
d) Unit Elastic
e) Inelastic