CHAPTER 4:

Elasticity of Demand and Supply

SUMMARY
 CHAPTER 4: ELASTICITY OF DEMAND AND
SUPPLY
Demand Elasticity
• Elasticity of demand [also called price elasticity of demand] is
defined as the percentage change in price that brought it about.
• When the percentage change in quantity is less than the
percentage change in price, demand is inelastic and a fall in price
lowers the total amount spent on the product. When the
percentage change in quantity is greater than the percentage
change in price, demand is elastic and a fall in price raises total
spending on the product.
• A more precise measure that gives unique value for elasticity at
any point on any demand curve replaces q/p measured
between two points on the curve with q/p measured along the
tangent to the curve at the point in question [symbolised by q/p].
CHAPTER 4: ELASTICITY OF DEMAND AND
SUPPLY

• The main determinant of the price elasticity of demand is the

availability of substitutes for the product. Any one of a group of
close substitutes will have a more elastic demand than the
group as a whole.
• Elasticity of demand tends to be greater the longer the time over
which adjustment occurs. Items that have a few substitutes in
the short run may develop ample substitutes when consumers
consumers ad producers have time to adapt.
• Income elasticity is the percentage change in quantity
demanded divided by the percentage change in income that
brought it about. The income elasticity of demand for a product
will usually change as income varies.
CHAPTER 4: ELASTICITY OF DEMAND AND
SUPPLY
• Cross-elasticity is the percentage change in quantity demanded
divided by the percentage change in the price of some other
product that brought it about. Products that are substitutes for
one another have positive cross-elasticities; products that
complement one another have negative cross-elasticities.
Supply Elasticity
• Elasticity of supply measures the ratio of the percentage change
in the quantity supplied of a product to the percentage change in
its price.
• A commodity’s elasticity of supply depends on how easy it is to
shift resources into the production of that commodity and how
the costs of producing the commodity vary as its production
varies.
CHAPTER 4: ELASTICITY OF DEMAND AND
SUPPLY

Measurement of Demand and Supply

• Over the years economists have measured many price, income,
and cross-elasticities of demand. Being able to do so requires
the use of statistical techniques to measure the separate
influences of each of several variables when all are changing at
once. It also requires a solution of the identification problem,
which refers to measuring the separate shapes of the demand
and supply curves. This can not be done from price and quantity
data alone.