Michael Melvin and William Boyes

Principles of
Microeconomics
9e
Elasticity: Demand and Supply
Chapter 5

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Elasticity

The responsiveness of quantity demanded or

quantity supplied to a change in one of the
determinants of demand and/or supply.

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Price Elasticity of Demand

Definitions of Price Elasticity of Demand:

the percentage change in the quantity demanded

of a product divided by the percentage change in
the price of that product.

The more price-elastic demand is, the more

responsive consumers are to a price change.
Conversely, the less price-elastic demand is,
the less responsive consumers are to a price
change.

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Price Elasticity: Mathematical Definition

The price elasticity of demand, ed, is:

%Q
ed
%P

In plain english: the percentage change in

quantity demanded divided bz the percentage
change in price.

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Defining Elasticities

When price elasticity is between zero and -1

we say demand is inelastic.

When price elasticity is between -1 and

- infinity, we say demand is elastic.

When price elasticity is -1, we say demand is

unit elastic.

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Sign of Price Elasticity

According to the law of demand, whenever the

price rises, the quantity demanded falls, and
vice versa. There is an inverse relationship
between price and quantity demanded. Thus
the price elasticity of demand is always
negative.
Because it is always negative, economists
often state the value without the sign
(absolute value).
In this case: 1 is unit elastic, 0 to 1 is inelastic,
and 1 to infinity is elastic.
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Demand Curve Shapes and Elasticity

Perfectly Elastic Demand Curve

Perfectly Inelastic Demand Curve

The demand curve is horizontal, any change in price

can and will cause consumers to change their
consumption.

The demand curve is vertical, the quantity demanded

is totally unresponsive to the price. Changes in price
have no effect on consumer demand.

In between the two extreme shapes of demand

curves are the demand curves for most products.
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Demand Curve Shapes and Elasticity

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Price Elasticity Along a Straight Line Demand Curve

The price elasticity of demand changes as

we move up or down a straight-line
demand curve. The price elasticity
becomes more inelastic as we move down
the curve.

If an entire demand curve (D2) is more

elastic than another (D1), it means that at
every single price, D2 is more elastic than
D1.

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Elastic and Inelastic

All downward-sloping straight-line demand

curves are divided into three parts:

Elastic region
Unit elastic point
Inelastic region

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The Price Elasticity of Demand along a Straight-Line

Demand Curve

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Determinants of the Price Elasticity of

Demand

The degree to which the price elasticity of

demand is inelastic or elastic depends on:

How many substitutes there are

How well a substitute can replace the good or
service under consideration
The importance of the product in the consumers
total budget
The time period under consideration

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Other Demand Elasticities

Demand may respond to changes in other

variables. The measures of such responses
are also elasticities.

Cross-Price Elasticity of Demand: The percentage

change in the quantity demanded for one good
divided by the percentage change in price of a
related good.
Measures the degree to which goods are
substitutes or complements.

If the cross-price elasticity is positive, then the goods

are substitutes.
If the cross price elasticity is negative, then the goods
are complements.

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Other Demand Elasticities

Income Elasticity of Demand: the percentage

change in the quantity demanded of a good
divided by the percentage change in income.

Normal goods: goods for which the income

elasticity of demand is positive.
Inferior goods: goods for which the income
elasticity of demand is negative.
Luxury goods: goods for which the income
elasticity of demand is a large positive number.

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Calculating Elasticity

Price elasticity can be calculated in two ways:

Point elasticity: price elasticity of demand

measured at a single point on the demand curve.
Arc elasticity: price elasticity of demand measured
over a range of prices and quantities along the
demand curve.

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Point Elasticity

Point elasticity of demand = [Q/P]*[P/Q].

[Q/P] is the inverse of the slope of the
demand curve.

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Arc Elasticity

Arc elasticity of demand =

[Q2 Q1]/[Q2 + Q1]/2
[P2 P1]/[P2 + P1]/2

This is the equivalent to:

[Q/P][average P/average Q]

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Calculation of Income Elasticity

The definition of income elasticity is:

Q/I * I/Q,
Where I represents income.

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Calculation of Cross-Price Elasticity

The definition of cross-price elasticity is:

Q/PX * PX/Q
Where PX is the price of a related good.

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The Price Elasticity of Supply

The price elasticity of supply is the percentage

change in the quantity supplied divided by the
percentage change in price.
S

%Q
es
%P

So this can be stated as: percent change in

quantity supply divided by the percent change in
price.

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Price Elasticity of Supply and Shape of Supply Curve

The price elasticity of supply is either zero or a

positive number.

A zero price elasticity of supply means that

the quantity supplied will not vary as the price
varies.

A positive price elasticity of supply means that

as the price of an item rises, the quantity
supplied rises.

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Supply Curve Shapes and Elasticity

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Supply Elasticities in the Long and Short

Runs

The shape of the supply curve depends

primarily on the length of time being
considered.

In the short run, at least one of the resources used

in production cannot be changed.
In the long run, the firm has long enough to
change any aspect of production, and therefore
can more fully respond.

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Interaction of Price Elasticities of Demand and

Supply

Both the price elasticity of demand and the price

elasticity of supply determine the full effect of a
price change.

If the price elasticity of supply of an item is large

and the demand for it is price inelastic, then the
firm can raise the price without losing revenue.

Conversely, if the price elasticity of supply is small

and the price elasticity of demand is large, then
the firm is unable to raise the price because the
consumer will switch to another firm or product.
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Tax Incidence

How much of a tax is paid by producers or

consumers is called the incidence of a tax.

If producers pay a larger share, it is said that the

incidence of tax falls on producers.
If consumers pay a larger share, it is said that the
incidence of tax falls on consumers.

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distributed with a certain product or service or otherwise on a password-protected website for classroom.