THE BASIC CONCEPT OF

ELASTICITY OF DEMAND
 Basic Concept

% change in Q Q / Q Q P
eQ,P    
% change in P P / P P Q

• Arc Elasticity
• Point Elasticity
 Classification of Elasticity

Value of eQ,P at a Point Classification of

Elasticity at This Point

eQ,P < -1 Elastic

eQ,P = -1 Unit Elastic

eQ,P > -1 Inelastic

 Factors that Affect the Elasticity of
Demand
• Substitution of products available in the
market at competitive prices
• Adjustment periods
• The lifetime of the product
• Degree of interest or the needs of consumers
• The degree of market saturation
• Range of use of the product
• The percentage of the consumer's budget
 Elasticity Vs Total Revenue
• Marginal Revenue = price affect + quantity
affect

Responses of PQ

Demand Price Increase Price Decrease

Elastic Falls Rises

Unit Elastic No Change No Change

Inelastic Rises Falls

Cross-Price Elasticity of Demand

% change in Q Q P'
eQ,P '   
% change in P' P' Q

• Gross substitutes  eQ,P’ > 0

• Gross complements  eQ,P’ < 0
 Income Elasticity of Demand

% change in Q Q I
eQ,I   
% change in I I Q

• Normal goods  eQ,I > 0

– Luxury goods  eQ,I > 1
• Inferior goods  eQ,I < 0