Chapter 3

Elasticity

Prepared by Murray Davidson, Centennial College.

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Learning Objectives
 The definition, calculation of price
elasticity of demand, and its impact on
sellers’ revenues..

2
Elastic and Inelastic Demand
Price elasticity of demand shows how
responsive consumers are to price changes.
 Elastic demand:
% change in QD > % change in price
 Inelastic demand:

% change in QD < % change in price.

 Unit-elastic demand:

% change in QD = % change in price.

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Elastic and Inelastic Demand (a)
FIGURE 3.1

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Perfectly Elastic and Perfectly
Inelastic Demand FIGURE 3.2

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Revenues with
Revenue Elastic
Changes Demand
with Elastic
Figure 3.3 Page 63
Demand
FIGURE 3.3

A price change causes total revenue to change in

the opposite direction when demand is elastic. 7
Revenues with
Revenue Inelastic
Changes Demand
with Inelastic
Figure 3.4 Page 64
Demand
FIGURE 3.4

A price change causes total revenue to change in

the same direction when demand is inelastic. 8
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Active Learning: Elasticity and
Total Revenue
From the following quotations, what, if anything, can you
conclude about price elasticity of demand?
1.“good weather resulted in record wheat harvests and sent
wheat prices tumbling. The result has been disastrous for
many wheat farmers.”
2.“ridership always went up when bus fares came down, but
the increased patronage never was enough to prevent a
decrease in overall revenue.”
3.“as the price of CD players fell, producers found their
revenues soaring.”
4.“coffee to me is an essential good – I’ve just gotta have it
no matter what the price.”

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Factors That Affect Price Elasticity
of Demand
There are four factors of price elasticity
of demand:
 portion of consumer incomes (products
with smaller portions are more inelastic)
 access to substitutes (products with more

substitutes are more elastic)

 necessities versus luxuries (more inelastic

for necessities and more elastic for luxuries)

 time (more elastic with the passage of time)

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Calculating Demand Elasticity
 A numerical value for price elasticity of
demand (ed) is found by taking the ratio
of the changes in quantity demanded
and in price, each divided by its average
value.
 In mathematical terms:

ed = ΔQd ÷ average Qd
Δprice ÷ average price
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Active Learning: Elasticity and
Total Revenue

© 2020 by McGraw-Hill Education Ltd. 13