Finding Elasticities

Definitions

If the demand for good 1 is x1 (p2 , p2 , m) where p1 and p2 are prices and m is
income the own price elasticity of demand is defined as
x1 p1
.
p1 x1
This is the limit of the
proportional change in quantity
proportional change in price
as the change in price becomes smalller and smaller. As the proportional change
does not depend on the units in which something has been measured so has no
units elasticity also does not depend on units.
The income elasticity of demand measures the eect of changes in income
on demand. It is
x1 m
.
m x1
The cross price elasticity of demand measures the eect of changes in
one price on demand for another. Where there are two goods the cross price
elasticity of demand for good 1 is
x1 p2
.
p2 x1

Example

Given a demand function elasticity should be expressed in terms of p1 , p2 and

m. If demand for good 1 is
x1 (p2 , p2 , m) =
then

and

so

2m
5 p1

x1
2m
= 2
p1
5 p1
x1
1
=
p1
p1

2m
5 p1

p1
5 p21
=
x1
2m

2m
5 p21

so the own price elasticity of demand is

2
2m
5 p1
x1 p1
=
= 1.
2
p1 x1
5 p1
2m
Similarly if
2m
5 p1

x1 (p2 , p2 , m) =
then

and

x1
2 1
=
m
5 p1
x1
1
=
m
m

so

2m
5 p1

2 1
5 p1

5
m
= p1
x1
2

so the income elasticity of demand for good 1

2 1
5
x1 m
=
p1 = 1.
m x1
5 p1
2
If
x1 (p2 , p2 , m) =
then

and

so

2m
5 p1

x1
=0
p2
1
x1
=
p2
p2

2m
5 p1

2 m
5 p1 p2

5 p1 p2
p2
=
x1
2 m

so the cross price elasticity of demand is

5 p1 p2
x1 p2
=0
= 0.
p2 x1
2 m