4 KINDS OF ELASTICITY

Criteria EDP EDI EDX,Y ES P

(Price elasticity of demand) (Income elasticity of demand) (Cross-Price elasticity of (Price elasticity of supply)
demand)
Denifition Reflects the percentage Reflects the percentage change of Reflects the percentage change Reflects the percentage
change of quantity quantity demanded over of one good’s quantity change of quantity supplied
demanded over percentage percentage change of income demanded over percentage over percentage change of
change of price (ceterus (cetirus paribus) change of price of other goods price (cetirus paribus)
paribus) (cetirus paribus)
Formula %ΔQd %ΔQd %ΔQdx %ΔQs
EPD = EPD = EPD = EPD =
%P %I %Py %P
Meanings Measures buyers’ Measures buyers’ Measures buyers’ measures sellers’
price-sensitivity when income-sensitivity when quantity sensitivity to price of other price-sensitivity when
quantity demanded of one demanded of one good changes goods when one good’s quantity quantity supplied of one good
good changes demanded changes changes
EDP ES P
Classification Five kinds of elasticity (you should draw 5 graphs to clarify) Five kinds of elasticity (you should draw 5 graphs to clarify)
%ΔQd 0% %ΔQ𝑠 0%
• Perfectly inelastic demand: ED = = =0 • Perfectly inelastic supply: ES = = =0
P %ΔP 10% P %ΔP 10%

%ΔQd <10%
• Inelastic demand: EPD = = <1 • Inelastic supply: EP𝑆 =
%ΔQ𝑠
=
<10%
<1
%ΔP 10% %ΔP 10%
 %ΔQ𝑠 10%
• Unit elastic supply: E𝑆 = = =1
P %ΔP 10%
%ΔQd 10%
• Unit elastic demand: ED = = =1
P %ΔP 10%

%ΔQ𝑠 >10%
• Elastic supply: E𝑆 = = >1
P %ΔP 10%
%ΔQd >10%
• Elastic demand: E
P
D
= = >1
%ΔP 10%
 %ΔQ𝑠 10%
%ΔQd 10% • Perfectly elastic supply: E𝑆 = = =∞
• Perfectly elastic demand: E = D
= =∞ P %ΔP 0%
P %ΔP 0%

In conclusion, the more ESP, the flatter the S curve.

In conclusion, the more EDP, the flatter the D curve.

Calculating Using mid-point method Using mid-point method

(Qd2 − Qd1) (QS2 − QS1)
(Q + Q d2 )/2 (Q + Q S2 )/2
EPD = d1 EPS = S1
(P2 − P1) (P2 − P1)
(P1 + P2 )/2 (P1 + P2 )/2
 NOTE: EDP increases when moving downward the linear EP𝑆 increases when moving upward the linear supply curve
demand curve

EA = 1; EB = 3.52

Determinants 1. EDPis higher when close sustitutes are available. 1. EP𝑆 is higher when sellers can easily change the quantity they
2. EDPis higher for narrowly defined goods than for broadly produce.
defined ones. 2. ESP is higher in the long run.
3. EDPis higher for luxuries than for necessities.
4. EDPis higher in the long run.
Applications Relationship between EDPand Total revenue Relationship between E𝑆P and Total revenue
❖ For a price increase, if demand is elastic • For a price increase if supply is elastic
▪ E > 1: % change in Q > % change in P - E > 1: % change in Q > % change in P
▪ The fall in revenue from lower Q > the increase in - → TR increases
revenue from higher P → TR decreases • For a price increase if supply is inelastic
❖ For a price increase, if demand is inelastic - E < 1: % change in Q < % change in P
▪ E < 1: % change in Q < % change in P - → TR
▪ The fall in revenue from lower Q < the increase in
revenue from higher P → TR increases
❖ When D is unit-elastic, an increase in price leaves
revenue unchanged:
▪ the increase in revenue from higher P exactly
offsets the lost revenue due to lower Q.