GOVERNMENT COLLEGE WOMEN

UNIVERSITY FSD
 Name: Freeha Naz
 Department: Economics
 Subject: Principles of Microeconomics
 Lecture: 9
MARKET ECONOMY
ELASTICITY:
THE RESPONSIVENESS OF DEMAND
 CONTENTS
1. Define the price elasticity of demand and
understand how to calculate it.
2. Understand the determinants of the price
elasticity of demand.
3. Understand the relationship between the
price elasticity of demand and total revenue.
4. Define the cross-price elasticity of demand
and the income elasticity of demand, and
understand their determinants and how they
are calculated.
5. Use price elasticity and income elasticity to
analyses economic issues.
OBJECTIVES:
ELASTICITY OF DEMAND
1. Define the price elasticity of demand and
understand how to calculate it.
2. Understand the determinants of the price
elasticity of demand.
3. Understand the relationship between the
price elasticity of demand and total revenue.
4. Define the cross-price elasticity of demand
and the income elasticity of demand, and
understand their determinants and how they
are calculated.
5. Use price elasticity and income elasticity to
analyses economic issues.
ELASTICITY OF DEMAND
Elasticity:
Elasticity is referred to the responsiveness of
one economic variable due to a change in
another economic variable.
THE PRICE ELASTICITY OF DEMAND AND ITS
DETERMINANTS
Price elasticity of demand
 The price elasticity of demand measures how
much the quantity demanded responds to a
change in price.
TYPES Price ELASTICITY OF
DEMAND
1.ELASTIC DEMAND
 Elastic demand: Demand is elastic when the
percentage change in quantity demanded is
greater than the percentage change in price.
 The price elasticity is greater than one in
absolute value.
2.INELASTIC DEMAND
 Inelastic demand: Demand is inelastic when
the percentage change in quantity demanded
is less than the percentage change in price.
The price elasticity is less than one in absolute
value.
3.UNIT ELASTIC DEMAND
 Unit elastic demand: Demand is unit elastic
when the percentage change in quantity
demanded is equal to the percentage change
in price.
The price elasticity is equal to one in absolute
value.
4.PERFECTLY ELASTIC DEMAND
 Perfectly elastic demand means when the
percentage of change in quantity demanded
is infinite even if the percentage of change
in price is zero, the demand is said to
be perfectly elastic.
5.PERFECTLY INELASTIC
DEMAND
 This means that demand for a good does not
change in response to price. Perfectly
Inelastic Demand:
When demand is perfectly inelastic,
quantity demanded for a good does not
change in response to a change in price.
OTHER DEMAND ELASTICITY
 Cross-Price Elasticity of Demand
A measure of how much the quantity
demanded of one good responds to a change
in the price of another good, computed as
the percentage change in quantity demanded
of the first good divided by the percentage
change in the price of the second good
SUMMARY OF
CROSS PRICE ELASTICITY
Then the cross-price
If the products
elasticity of demand will be Example
are …
…

substitutes positive Tea and Coffe

complements negative Shoes and polish

unrelated zero Chips and fish

OTHER DEMAND ELASTICITY
 The Income Elasticity of Demand
A measure of how much the quantity
demanded of a good responds to a change in
consumers’ income, computed as the
percentage change in quantity demanded
divided by the percentage change in income.
SUMMARY OF
INCOME ELASTICITY OF DEMAND
If the income
elasticity of demand Then the good is … Example
is …

Positive, but less normal and a

milk
than 1 necessity

Positive and greater

normal and a luxury caviar
than 1

Negative an inferior good high-fat meat