ELASTICITY measures market responsiveness
to changes in various factors.
The Elasticity of Demand
1. Price Elasticity of Demand: measure of how
much the quantity demanded responds to a change
in price.
Determinants of Price Elasticity of Demand
1. Availability of Close Substitute
2. Necessities versus Luxuries
3. Definition of the Market
4. Time Horizon
Formula:
Price Elasticity of Demand = (Percentage
Change in Quantity Demanded) / (Percentage
Change in Price)
Elastic vs. Inelastic Demand: Describes how
responsive quantity demanded is to price changes.
 The Midpoint Method:
- Instead of dividing by the initial level, the
midpoint method calculates percentage changes
by dividing the change by the midpoint (average)
of the initial and final levels.
- Formula for Percentage Change Using
Midpoint Method:
[(Change / Midpoint) x 100]
The formula for calculating price elasticity
using the midpoint method:
Price Elasticity of Demand = [(ΔQ / [(Q₁ + Q ₂) /
2]) / (ΔP / [(P₁ + P₂) / 2])]
Elasticity Classification:
1. Demand is elastic (elasticity > 1)
2. Demand is inelastic (elasticity < 1)
3. Unit elasticity (elasticity = 1)
Total Revenue Formula:
Total Revenue = Price (P) × Quantity (Q)
The Relationship Between Elasticity and the
Demand Curve:
 A flatter demand curve indicates greater
price elasticity of demand.
 A steeper demand curve indicates
smaller price elasticity of demand.
Effect of Price Changes on Total Revenue:
 Inelastic demand: Price increase leads to an
increase in total revenue.
 Elastic demand: Price increase leads to a
decrease in total revenue.
 Unit elastic demand: Total revenue remains
constant when the price changes.
2. Income Elasticity of Demand: measures how
quantity demanded changes as consumer income
changes.
Formula:
Income Elasticity of Demand = (Percentage
Change in Quantity Demanded) / (Percentage
Change in Income)
3. Cross-Price Elasticity of Demand: measures
how the quantity demanded of one good responds
to a change in the price of another good.
Formula:
(Percentage Change in Quantity Demanded of
Good 1) / (Percentage Change in the Price of
Good 2)
The Elasticity of Supply
Price Elasticity of Supply: measures how
the quantity supplied responds to changes
in price.
Formula:
Price Elasticity of Supply Formula: (Percentage
Change in Quantity Supplied) / (Percentage
Change in Price)
Variety of Supply Curves
1. Price elasticity of supply affects the
appearance of the supply curve.
2. Panel (a): Perfectly inelastic supply
(vertical supply curve).
3. Panel (e): Perfectly elastic supply
(horizontal supply curve).