Chapter 6

Concept
of
Elasticity
1

Chapter 6

Concept of Elasticity

Elasticity
- Measures the degree of
responsiveness in the quantity per unit of
time to a change in any one of the factors of
demand and supply.
- The responsiveness of one variable

to changes in another.
2

Chapter 6

Concept of Elasticity

When price rises, what happens

to demand?
Demand falls
BUT!
How much does demand fall?
3

Chapter 6

Concept of Elasticity

If price rises by 10% - what happens

to demand?
We know demand will fall
By more than 10%?
By less than 10%?
Elasticity measures the extent to which
demand will change

Chapter 6

Concept of Elasticity

4 Types Elasticity
Price Elasticity of Demand
Price Elasticity of Supply
Income Elasticity of Demand
Cross Elasticity

Chapter 6

Concept of Elasticity

Price Elasticity of Demand

- The sensitivity of quantity demanded
to price; the percentage change in quantity
demanded caused by a 1-percent change in
price.
6

Chapter 6

Concept of Elasticity
The Formula:

ED =

% Change in Quantity Demanded

___________________________
% Change in Price

Note: ED has sign in front of it; because as price rises

demand falls and vice-versa (inverse relationship between
price and demand)
7

Chapter 6

Concept of Elasticity

Five Types of Elasticity of Demand

1.Inelastic Demand
2.Perfectly Inelastic Demand

3.Elastic Demand
4.Perfectly Elastic Demand
5.Unitary Elastic Demand

Chapter 6

Concept of Elasticity

Inelastic Demand
- A price elasticity of demand between 0
and 1
- Inelastic demand means that the
percentage change in quantity demanded will be
smaller than the percentage change in price.
Quantity demanded is not very sensitive to price.
9

Chapter 6

Concept of Elasticity

Inelastic Demand

10

10

Chapter 6

Concept of Elasticity

Perfectly Inelastic Demand

- A price elasticity of demand equal to 0.
- An extreme case of inelastic demand
occurs when a change in price causes
absolutely no change in quantity demanded
at all.
11

Chapter 6

Concept of Elasticity

Perfectly Inelastic Demand

8
7
6
5

12

Chapter 6

Concept of Elasticity

Elastic Demand
- A price elasticity of demand less than 1.
- Elastic demand means that the
percentage change in quantity demanded will
be larger than the percentage change in price.
Quantity demanded is sensitive to price.
13

Chapter 6

Concept of Elasticity

Elastic Demand

20

14

Chapter 6

Concept of Elasticity

Perfectly Elastic Demand

- A price elasticity of demand
approaching minus infinity.
- An extreme case of elastic demand
occurs when even the tiniest change in price
causes a huge change in quantity demanded,
so huge that, for all intents and purposes, we
call the response infinite.
15

Chapter 6

Concept of Elasticity

Perfectly Elastic Demand

8
7
6
5

10

15

20

25

16

Chapter 6

Concept of Elasticity

Unitary Elastic Demand

- A price elasticity of demand equal to 1.
- Demand for the good is exactly at the
boundary between elastic and inelastic.

17

Chapter 6

Concept of Elasticity

Perfectly Elastic Demand

20
15
10
5

10

15

20

25

30

18

Chapter 6

Concept of Elasticity

Elasticity and Total Revenue

TR = P x Q
Where demand is price inelastic, total revenue moves
in the same direction as price. Where demand is elastic, total
spending moves in the opposite direction as price. Finally,
where demand is unitary elastic, total revenue remains the
same as price changes.
19

Chapter 6

Concept of Elasticity

Effects of Price Changes on Expenditure

20

Chapter 6

Concept of Elasticity
Price Elasticity of Demand Matrix
Type

Numerical
Value

Description

Shape of Curve

Example

Inelastic
Perfectly Inelastic
Elastic
Perfectly Elastic

Unitary Elastic
21

Chapter 6

Concept of Elasticity

Using Price Elasticity of Demand

The War on Drugs

22

Chapter 6

Concept of Elasticity

The Basic Principle of Policy Tradeoffs

Policy Tradeoffs
Government policy is constrained by the
reaction of private decision makers. As a result,
policy makers face tradeoffs: making progress toward
one goal often requires some sacrifice of another
goal.
23

If you cant explain it simply,

you dont understand it well
enough.
- Albert Einstein
24

End
of
Presentation
japdp
25