Economics I

(TKT-151)

Chapter 7: Elasticity

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 Outline

1. Elasticity
2. Price elasticity of Demand
3. Interpretation of the demand elasticity coefficient
 Objectives

The objective of this chapter is to discover the Factors changing the demand,
supply, and equilibrium.
 What is elasticity

In economics, elasticity measures the percentage change of one economic variable

in response to a percentage change in another.
If the price elasticity of the demand of something is -2, a 10% increase in price
causes the demand quantity to fall by 20%
 Price Elasticity of Demand

• Price Elasticity of Demand measures the responsiveness of quantity demanded

relative to changes in price

• Elasticity measures the responsiveness in terms of percentage changes in both

variables

• It is a number, called a coefficient (Ed), that represents the ratio of two percentage
changes
 How to calculate the price elasticity of
demand ?

Where Ed = coefficient of price elasticity

of demand
% = percentage
Δ stands for “change in”
 Example 1 on price Elasticity of Demand
calculation
Example 1: A computer seller raises the price by 10 percent, and as a result the quantity
demanded for the computer falls by 20 percent.
Solution:

Note: Law of Demand: when P increase Qd decrease and when P decrease Qd increases
Therefore, price elasticity of demand is always negative; however, for simplicity purposes, we
take the absolute value.
 Example 2 on price Elasticity of Demand
calculation
Example 2: If the price of a good changes from $12 to $10, its quantity demanded changes
from 50 units to 100 units.
Solution:
Price ($) Price elasticity of
demand at a point
midway between
A the 2 points
12

B
10

0 50 100 Quantity
Demanded
 Elasticity Is Not Slope

Point Price Quantity

Demanded
Slope and price elasticity are NOT the same
A $ 12 50
B 10 100
C 8 150

Price ($)

A
12
B
10
C
8
D

0 50 100 150 Quantity

Demanded
Interpretation of the demand elasticity
coefficient

Ed

Ed > 1 Ed < 1 Ed = 1 Ed = ∞ Ed = 0
Demand is Demand is Unit Demand is Demand is
Demand is Elastic Inelastic elastic Perfectly elastic Perfectly inelastic
 Elastic Demand Ed > 1

When the %Δ in quantity demanded is greater than the %Δ in price

Ed > 1
Elastic

P2
Price

10%
P1
D
20%

0 Q2 Q1
Quantity Demanded
 Elastic Demand Ed > 1

Goods and services with Elastic Demand generally have plenty of substitutes

As the good/service’s price increases, its quantity demanded can drop quickly

Examples: furniture, motor vehicles, cars, soft drinks, chocolate bars, tissue
paper, …
 Inelastic Demand Ed < 1

When the %Δ in quantity demanded is less than the %Δ in price

Ed < 1
Inelastic

P2
Price

10%
P1

4% D

0 Q2 Q1
Quantity Demanded
 Inelastic Demand Ed < 1

Goods and services with Inelastic demand generally have fewer substitutes

A price change of a good/service does not affect the quantity demanded as

dramatically

Examples: eggs, salt, food, prescription drugs, cigarettes, gasoline, …

 Unit Elastic Demand Ed = 1

When the %Δ in quantity demanded is equal to the %Δ in price

Ed = 1
Unit Elastic

P2
Price

10%
P1 D

10%

0 Q2 Q1
Quantity Demanded
 Unit Elastic Demand Ed = 1

It is extremely difficult to encounter goods and services with unit elastic

demand

Examples: movies, tires, shellfish and oysters consumed at home, private

education, …
 Perfectly Elastic Demand Ed = ∞

When a small %Δ in price causes an extremely large %Δ in quantity demanded (from

buying all to buying nothing)

Ed = ∞
Perfectly Elastic
Price

P1
D

0 Q1
Quantity Demanded
 Perfectly Elastic Demand Ed = ∞

Goods with Perfectly elastic demand are usually goods that take up a large
share of an individual’s income and have extremely many substitutes

Examples : sports cars

 Perfectly Inelastic Demand Ed = 0

When the quantity demanded does not change as price changes

Ed = 0
Perfectly Inelastic
Price

P2
10%
P1

0 Q1
Quantity Demanded
 Perfectly Inelastic Demand Ed = 0

Goods with Perfectly inelastic demand are usually goods with limited supply of
inputs and necessities with no close substitutes

Examples: medicine when a life’s person is in danger such as insuline.

Price Elasticity of Demand

Elasticity Responsiveness of Qd to a Terminology

Coefficient Change in P
Ed > 1 %ΔQd > %ΔP Elastic
Ed < 1 %ΔQd < %ΔP Inelastic
Ed = 1 %ΔQd = %ΔP Unit Elastic
Ed = ∞ %ΔQd  ∞; %ΔP ≈ 0 Perfectly elastic
Ed = 0 %ΔQd = 0 Perfectly inelastic
For practice solve the exercises in the Worksheet:

Exercise 1
Exercise 2