Add up to 20 keywords to increase discoverability by 30%

Elasticity Concepts

1. Elasticity . . .
•… allows us to analyze supply and demand with greater
precision.
•… is a measure of how much buyers and sellers respond
to changes in market conditions

2. THE ELASTICITY OF
DEMAND
•The price elasticity of demandis a measure of
how much the quantity demanded of a good
responds to a change in the price of that good.
•When we talk about elasticity, that
responsiveness is always measured in
percentage terms.
•Specifically, the price elasticity of demand is
the percentage change in quantity demanded
due to a percentage change in the price.

3. Computing the Price Elasticity
of Demand
•The price elasticity of demand is computed as
the percentage change in the quantity
demanded divided by the percentage change in
price.Price elasticity of demand=
Percentage change in quantity demanded
Percentage change in price

4. •Example: If the price of an ice cream cone
increases from $6.00 to $5.00 and the amount
you buy falls from 7to 11cones, then your
elasticity of demand would be calculated as:

5. Computing the Price
Elasticity of Demand
•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 elasticity of demand
would be calculated as:( )
(. .)
.
108
10
100
220200
200
100
20%
10%
2




  Price elasticity of demand=
Percentage change in quantity demanded
Percentage change in price
810
-20
-2

6. The Variety of Demand
Curves
•Inelastic Demand
oQuantity demanded does not respond strongly to
price changes.
oPrice elasticity of demand is less than one.
•Elastic Demand
oQuantity demanded responds strongly to changes
in price.
oPrice elasticity of demand is greater than one.

7. The Variety of Demand
Curves
•Perfectly Inelastic
oQuantity demanded does not respond to price
changes.
•Perfectly Elastic
oQuantity demanded changes infinitely with any
change in price.
•Unit Elastic
oQuantity demanded changes by the same percentage
as the price.

8. Elasticity Values0 Perfectly inelastic
1 Inelastic
1 Unit elastic
1 Elastic
Perfectly elastic











9. Figure 1 The Price Elasticity
of Demand
(a) Perfectly Inelastic Demand: Elasticity Equals 0
$5
4
Quantity
Demand
1000
1. An
increase
in price . . .
2. . . . leaves the quantity demanded unchanged.
Price

10. Figure 1 The Price Elasticity
of Demand
(b) Inelastic Demand: Elasticity Is Less Than 1
Quantity0
$5
90
Demand1. A 22%
increase
in price . . .
Price
2. . . . leads to an 11% decrease in quantity demanded.
4
100

11. Figure 1 The Price Elasticity
of Demand
2. . . . leads to a 22% decrease in quantity demanded.
(c) Unit Elastic Demand: Elasticity Equals 1
Quantity
4
1000
Price
$5
80
1. A 22%
increase
in price . . .
Demand

12. Figure 1 The Price Elasticity
of Demand
(d) Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
1000
Price
$5
50
1. A 22%
increase
in price . . .
2. . . . leads to a 67% decrease in quantity demanded.

13. Figure 1 The Price Elasticity
of Demand
(e) Perfectly Elastic Demand: Elasticity Equals Infinity
Quantity0
Price
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
1. At any price
above $4, quantity
demanded is zero.
3. At a price below $4,
quantity demanded is infinite.

14. The Price Elasticity of Demand
•The sign of price elasticity of demand is
always negative, indicating the inverse
relationship

15. Other Demand Elasticities
•Cross-price elasticity of demand
oA measure of how much the quantity demanded of one
good responds to a change in the price of another good,
computed as the percentage change in quantity
demanded of the first good divided by the percentage
change in the price of the second good2 good of pricein %change
1 good of demandedquantity in %change
demand of elasticity price-Cross 

16. Cross Price Elasticity of
Demand
•Definition: responsiveness of quantity demand of a
good to changes in price of other goods.
•Formula:
•Sign: + for substitutes,
-for complements%
%
dx
xy
y
Q
e
P




17. Calculate the cross elasticity of demand for
the two goods oranges and bananas if you
know that an increase in the price of
bananas by 20% led to an increase in the
quantity demanded of oranges by 10%?
Example

18. •Calculate the cross elasticity of demand
for the two goods, tea and sugar, if you
know that a 10% increase in the price of
sugar led to a 15% decrease in the
quantity demanded of tea?
Example

19. Other Demand Elasticities
•Income Elasticity of Demand
oIncome elasticity of demandmeasures how
much the quantity demanded of a good
responds to a change in consumers’ income.
oIt is computed as the percentage change in
the quantity demanded divided by the
percentage change in income.

20. Other Demand
Elasticities
•Computing Income ElasticityIncome elasticity of demand=
Percentage change
in quantity demanded
Percentage change
in income
Remember, all elasticities are measured
by dividing one percentage change by
another

21. Income Elasticity of
Demand
•Definition: responsiveness of quantity demanded of a
good to changes in income
•Formula:
•Sign: + for normal goods
-for inferior goods%
%
dx
xI
Q
I





22. Other Demand Elasticities
•Income Elasticity
oTypes of Goods
•Normal Goods
•Inferior Goods
oHigher income raises the quantity demanded for normal goods but lowers the
quantity demanded for inferior goods.

23. •If IED > 0 the good is normal
•If IED < 0 the good is bad or inferior
•If IED > 1 the good is a luxury item
•If IED < 1 the good is necessary
income elasticity of demand

24. •If income increases from 5,000 pounds to
10,000 pounds, the quantity demanded for
a good increases from 10 units to 20 units
(with the price constant). Calculate the
income elasticity of demand
Example

25. •If income increases from 5,000 pounds to
10,000 pounds, the quantity demanded for
a good increases from 10 units to 15units
(with the price constant). Calculate the
income elasticity of demand
Example