14.03.

2022

ECON 294

Elasticity

Type of elasticity Absolute Value Explanation

Perfectly inelastic 0 (graph is vertical) When price increases demand

does not change at all
because there are no
alternatives

Perfectly elastic Infinity (graph is horizontal) When price increases even a

little bit demand will decrease
immediately to 0, because
there are a lot of alternatives.

Elastic Greater than 1 (ex. 1,5; 3; When price increase a little bit
15...) but demand decreases a lot.

Inelastic Value is between 0 and 1 (ex. When price increase a lot, but
0,2; 0,5; 0,9…) demand decreases a little bit.

Unity (unitary) 1 When price increase by X

elasticity percentage, demand
decreases by the same X
percentage.

Midpoint formula for calculating elasticity =

%change in quantity demanded / %change in price

% change in quantity demanded = ((Q2-Q1)/(Q1+Q2)/2)*100%

% change in price = ((P2-P1)/(P1+P2)/2)*100%

Elasticity formula = ((Q2-Q1)/(Q1+Q2)/2)*100% / ((P2-P1)/(P1+P2)/2)*100%

Slide 7
P1 = 3, P2 = 2
Q1 = 5, Q2 = 10
Elasticity = ((10-5)/7.5)/((2-3)/2.5)= 0.66/(-0.4) = -0.26
Calculation of elasticity from the Slides example (Slide 22):

Point C: P1=3; Q1=16

Point D: P2=2; Q2 = 18

Elasticity = %change in quantity / % change in price

% change in quantity = ((18-16)/(16+18)/2)*100% = (2/17)*100% = 0.12*100% = 12%

% change in price = ((2-3)/(2+3)/2)*100% = (-1/2.5)*100% = 0.4*100% = - 40%

Elasticity = 12%/(-40%) = - 0.3 inelastic

TR = P x Q

Type of elasticity Changes in P and Q Changes in TR

Inelastic P↑↑↑ in this case Qd↓ (benzin) TR = ↑↑↑x↓ = ↑

Perfectly inelastic P↑↑↑ in this case change in Qd = TR = ↑↑↑x no change in Q = ↑

0 (insulin)

Elastic P↑ in this case Qd↓↓↓ (apples) TR = ↑ x ↓↓↓ = ↓

TR = ↓ x ↑↑↑ = ↑

Perfectly elastic P↑ in this case decrease in Qd TR = ↑ x ↓↓↓↓↓↓↓↓↓↓↓↓↓↓ = ↓

will be very very high

Unitary elasticity P↑ (20%) in this case Qd↓ TR = ↑ x ↓ = change in TR=0

(20%)

Other types of Elasticities:

1. Income elasticity of Demand = (% change in quantity demanded) / (% change in

Income)
It can be positive or negative and shows to us if this product is normal or inferior good.

If Income ↑ and as a result of this Qd ↑ as well, the elasticity will be positive and this product we call as
Normal good.
If Income ↑ and as a result of this Qd ↓, the elasticity will be negative and this product we call as Inferior
good.

2. Cross-Price Elasticity of Demand = (% change in Qd of good X) / (% change in price

of good Y).
It can be positive or negative which determines if products X and Y are substitutes or
complementary.

If Price of good Y ↑ and Qd of X ↑ as well, the cross-price elasticity will be postive, which
determines that products are substitutes (tea and coffee).

If Price of good Y ↑ and Qd of X ↓, the cross-price elasticity will be negative, which determines
that products are complementary (printer and paper or tea and sugar).

3. Elasticity of Supply = (% change in quantity supplied) / (% change in price)

It always will be positive because price and supply move in one direction and it will take
different values as Demand elasticity. (for types of elasticities look at price elasticity of
demand Table)

4. Elasticity of Labour Supply = (% change in labour supplied)/ (% change in Wage rate)

It can be positive and negative and determines if free time is normal or inferior good for
us.

If Wage rate ↑ and Labour Supply ↑ as well in this case we will have less free time. Labour
supply elasticity will be positive it means free time is inferior good for us.

If Wage rate ↑ and Labour Supply ↓ in this case we will have more free time, receiving similar
income as before. Labour supply elasticity will be negative it means free time is normal good for
us.