Price of Elasticity of Demand

the different outcomes arise from differing degrees of responsiveness of the quantity demanded to a
change in price
the slope of a demand curve depend on the units in which we measure the price and quantity
Price Elasticity of demand - a unit-free measure of responsiveness of the quantity demanded of a
good to a change in its price when all other inuences on buying plans
remain the same

Calculating Price Elasticity of Demand



we express the change in price as a percentage of the average price and the change in the quantity
demanded as a percentage of the average quantity.
by using the average price and average quantity, we calculate the elasticity at a point on the demand
curve midway between the original point and the new point
Refer to pg. 85

Average Price and Quantity
it gives the more precise measurement of elasticity-at the midpoint between the original price and new
price.

Percentage and Proportions
elasticity is the ratio of two percentage changes, so when we divide one percentage change by another
percentage change is a proportionate change multiplied by 1000

A Units-Free Measure
Elasticity is a units-free measure
the percentage change in each variable is independent of the units in which the variable is measured
the ratio of the two percentage is a number without ratio

Minus Sign and Elasticity
Price of good rises, QDemanded decreases
- because a positive change in price brings a negative change in the QDemanded
- the price elasticity of demand is a negative number
- we use the magnitude of the elasticity and ignore the minus sign








Inelastic and Elastic Demand
Perfectly Inelastic Demand- QDemanded is constant when price changes (Elasticity =0)
Unit Elastic Demand - percentage change in QDemanded = percentage change in price (Elasticity =1)
Inelastic Demand - percentage change in QDemanded is < percentage in price (Elasticity = 0 < 1)
Ex. Food and Shelter
Perfectly Elastic Demand- QDemanded changes by an innitely large percentage in response to a
tiny price change (Elasticity = innite)
Elastic Demand- percentage change in QDemanded > percentage change in price (Elasticity > 1)
Ex. Automobile and furniture

Elasticity Along A Linear Demand Curve
A Linear Demand curve has a constant slope but a varying elasticity.
Refer to p. 87

Total Revenue and Elasticity
Total Revenue- sale of goods equal the price of the good multiplied by the quantity sold
when price changes, total revenue also change
change in total revenue depends n the elasticity of demand
- If demand is elastic, 1% price cut increase the quantity sold by more than 1% and total revenue
increases
- If demand is inelastic, a 1% price cut increases the quantity sold by less than 1% and total revenue
decreases
- if demand is unit elastic, a 1% price cut increases the quantity sold by 1% and total revenue does not
change
A price cut in the elastic range brings an increase in total revenue- % increases the QDemanded is
greater than the % decrease in price
A price cut in inelastic range brings a decrease in total revenue- % increase in QDemanded is less than
the % decrease in price
Unit Elasticity- total revenue at maximum
Total Revenue Test- estimating the price elasticity of demand by observing the change in total revenue
that results from a change in the price
- if a price cut increases total revenue, demand is elastic
- if a price cut decreases total revenue, demand is inelastic
- if a price cut leave total revenue unchanged, demand is unit elastic

Your Expenditure and Your Elasticity
prices changes, the change in your expenditure on goods depends on your elasticity of demand
your demand is ELASTIC, 1% price cut increases the quantity you buy by MORE than 1% and your
expenditure on the item INCREASES
your demand is INELASTIC, 1% price cut increases the quantity you buy by LESS than 1% and your
expenditure on the item DECREASES
your demand is UNIT ELASTIC, 1% price cut increases the quantity you buy by 1% and your expenditure
on the item DOES NOT CHANGE

The Factors that Inuence the Elasticity of Demand
closeness of substitutes 1.
proportion of income spent on the good 2.
time elapsed since the price change 3.

Closeness of Substitutes
closer the substitutes for a good/ service, the more elastic the demand
Ex. oil is inelastic - no substitutes
the degree of substitutability depends on how narrowly we dene a good
a necessity has poor substitutes and it crucial for our well-being - an inelastic demand
Luxury usually has many substitutes- an elastic demand

Proportion of Income Spent on the Good
the greater the proportion of income spent on a good, the more elastic is the demand for it

Time Elapsed Since Price Change
the longer the time has elapsed since a price change, the more elastic is demand

More Elasticities of Demand
Cross Elasticity of Demand
Cross Elasticity of Demand- measure of responsiveness of the demand for a good to change in the price
of a substitute or complement
Cross Elasticity of Demand = (% change in QDemanded)/ (% change in price of substitute or complement)
Substitutes- positive / Complement- negative
Complement- the price and quantity change in opposite direction
the magnitude of the cross elasticity of demand determines how far the demand curve shifts
the larger the cross elasticity (absolute value), the greater is the change in demand and larger is the shift
in the demand curve

Income Elasticity of Demand
a measure of the responsiveness of the demand for a good or service to a change in income
Income Elasticity of Demand = (% change in QDemanded) / (% change in income)
- greater than 1 ( normal good, income elastic)
- positive and less than 1 ( normal good, income inelastic)
- Negative (inferior good)

Income Elastic Demand
when the demand for a good is income elastic, the % of income spent on that good increase as income
increases

Income Inelastic Demand
if the income elasticity of demand is positive, but less than 1, demand is income inelastic
when the demand for a good is income inelastic, the % of income spent on that good decreases as
income increases

Inferior Goods
if the income elasticity of demand is negative, the good is an inferior good
it decreases when income decreases (ex. motorcycle, potatoes, rice)


Elasticity of Supply
Calculating the Elasticity of Supply
measures the responsiveness of the quantity supplied to a change in the price of a good
Elasticity of Supply = (% change in QSupplied)/ (% change in price)
If the QSupplied is xed regardless of the price, the supply curve is vertical and the elasticity of supply is
zero ( perfectly inelastic)
No matter how steep the supple curve is, if it is linear and passes through the origin, supply is unit elastic
if there is a price at which sellers are willing to offer any quantity for sale, the supply curve is horizontal
and the elasticity of supply is innite ( supply is perfectly elastic)










The Factors that Inuence the Elasticity of Supply
Resources substitution possibilities 1.
Time frame for the supply decision 2.

Resources Substitution Possibilities
some good and services can be produced only by using unique or rare productive resoures
these items have a low, perhaps even a zero, elasticity of supply

Time Frame for the Supply Decision
Monetary Supply 1.
- the price of good changes it determines the immediate responses of the QSupplied
- some good such as fruits, vegetables have a perfectly inelastic momentary supply- vertical supply curve
- is perfectly inelastic b/c, no matter what the price of oranges, producers cannot change their output
2. Short-Run Supply
- determines the response of the QSupplied to a price change when only some of the possible
adjustments to production can be made
- most good have an inelastic short-run supply
- to increase output, rms must work their labour force over-time and perhaps hire more
- to decrease output, rms have to lay off workers

3. Long-Run Supply
- determines the response of the QSupplied to a price change after all the technologically possible ways of
adjusting supply have been exploited
- is elastic and perhaps perfectly elastic