Managerial Economics

Session 4b

ELASTICITIES
Prof. Dr. Ferdinand D. Saragih, MA.
University of Indonesia

Elasticities of Demand

How responsive is variable G to a change

in variable S

+ S and G are directly related

- S and G are inversely related

Own Price Elasticity of Demand

Negative according to the law of demand

Elastic:
Inelastic:
Unitary:

Perfectly Elastic & Inelastic Demand

Price

Price
D
D

Quantity
Perfectly Elastic

Quantity
Perfectly Inelastic

Own-Price Elasticity and Total Revenue

Elastic
Increase (a decrease) in price leads to a
decrease (an increase) in total revenue.
Inelastic
Increase (a decrease) in price leads to an
increase (a decrease) in total revenue.
Unitary
Total revenue is maximized at the point where
demand is unitary elastic.

Elasticity, TR, and Linear Demand

Price
10

Elastic

8
6
Inelastic

4
2

D
1

Quantity

Factors Affecting Own Price Elasticity

Available Substitutes

Time

The more substitutes available for the good, the more

elastic the demand.
Demand tends to be more inelastic in the short term
than in the long term.
Time allows consumers to seek out available
substitutes.

Expenditure Share

Goods that comprise a small share of consumers

budgets tend to be more inelastic than goods for which
consumers spend a large portion of their incomes.

Summary on own-price elasticities

Elasticities depend on expenditure shares

Elasticities depend on the availability of
substitutes
Elasticities depend on the time-frame
Revenue will go up/down with an increase is
price of demand is inelastic/elastic. Elastic
means Ep < -1.

Cross Price Elasticity of Demand

+ Substitutes
- Complements

Income Elasticity

+ Normal Good
- Inferior Good

10

Income elasticities

Inferior and Normal goods

EI<0 or EI>0

Luxuries and Necessities

EI>1
1>EI

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Uses of Elasticities

Pricing
Managing cash flows
Impact of changes in competitors prices
Impact of economic booms and recessions
Impact of advertising campaigns
And lots more!

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The End of this Session

Thank you

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