THE CONCEPT OF

ELASTICITY
 THE CONCEPT OF ELASTICITY
Elasticity is a measure of the
responsiveness of one variable to
another.
The greater the elasticity, the greater the
responsiveness.
 PRICE ELASTICITY

The price elasticity of demand is the percentage change

in quantity demanded divided by the percentage
change in price.

Percentage change in quantity demanded

ED =
Percentage change in price
 SIGN OF PRICE ELASTICITY
According to the law of demand, whenever the price
rises, the quantity demanded falls. Thus the price
elasticity of demand is always negative.
Because it is always negative, economists usually state the
value without the sign.
WHAT INFORMATION PRICE ELASTICITY PROVIDES

Price elasticity of demand and

supply gives the exact quantity
response to a change in price.
CLASSIFYING DEMAND AND SUPPLY AS ELASTIC OR
INELASTIC

Demand is elastic if the percentage

change in quantity is greater than the
percentage change in price.
E>1
CLASSIFYING DEMAND AND SUPPLY AS ELASTIC OR
INELASTIC

Demand is inelastic if the percentage

change in quantity is less than the
percentage change in price.

E<1
 ELASTIC DEMAND

Elastic Demand means that quantity

changes by a greater percentage than
the percentage change in price.
 INELASTIC DEMAND

Inelastic Demand means that

quantity doesn't change much with
a change in price.
 DEFINING ELASTICITY

When price elasticity is between zero and -1

we say demand is inelastic.

When price elasticity is between 1 and

- infinity, we say demand is elastic.

When price elasticity is =1, we say demand is

unitary elastic.
ELASTICITY IS INDEPENDENT OF UNITS

Percentages allow us to have a measure of

responsiveness that is independent of
units.
This makes comparisons of responsiveness
of different goods easier.
 CALCULATING ELASTICITY

To determine elasticity, divide the

percentage change in quantity by
the percentage change in price.
 THE END-POINT PROBLEM

The end-point problem – the

percentage change differs
depending on whether you view
the change as a rise or a decline in
price.
 THE END-POINT PROBLEM

Economists use the average of the end points to

calculate the percentage change.

(Q2 - Q1)
Elasticity = Q1
(P 2 - P1)
P1
 GRAPHS OF ELASTICITY

B
26
24 C (midpoint)
22
Price

A
20
18
D
16
14 Elasticity of demand
between A and B = 1.27
0 10 12 14
Quantity of software (in hundred thousands)
 CALCULATING ELASTICITY: PRICE
ELASTICITY OF DEMAND
P What is the price elasticity of
demand between A and B?
Q2–Q1
%ΔQ (Q1)
B
ED = %ΔP = P2–P1
Midpoint
26
C (P1)
23
20 A 10–14
(14) -.33
= 26–20 = .26 = 1.27
D (20)
Q
10 12 14
7-16
 PRICE ELASTICITY: SUPPLY

Price elasticity of supply is the percentage change in

quantity supplied divided by the percentage change
in price.

ES = % change in Quantity Supplied

% change in Price
• This tells us exactly how quantity supplied responds
to a change in price
• Elasticity is independent of units

7-17
 PRICE ELASTICITY: SUPPLY

Supply is elastic if the percentage change in quantity is

greater than the percentage change in price

• Supply is inelastic if the percentage change in quantity

is less than the percentage change in price

Inelastic supply is when ES < 1

7-18
CALCULATING ELASTICITY: PRICE
ELASTICITY OF SUPPLY
P What is the price elasticity of
supply between A and B? Q2–Q1
S
%ΔQ (Q1)
B
ES = %ΔP = P2–P1
5.00
Midpoint (P1)
4.75 C 485–476
(476) 0.0187
A = 5–4.50 = 0.105 = 0.18
4.50
(4.50)
Q
476 480.5 485

7-19
 GRAPHS OF ELASTICITY

6.00
5.50
Wage per hour

5.00 B
4.50 C (midpoint)
A
4.00
3.50
3.00 Elasticity of supply
between A and B = 0.18
0
470 480 490

Quantity of workers
 CALCULATING ELASTICITY

Q2  Q1
%Q (Q1 )
E 
%P P2  P1
( P1 )
 CALCULATING ELASTICITY OF DEMAND BETWEEN TWO
POINTS

Elasticity of demand % Q
E
26 between A and B: % P
B
24 10  14  4
22 (14)  .33
midpoint C ED   14   1.27
Price

20 26  20 6 .26
A (20) 20
18
16 Demand
14

0
10 12 14
Quantity of software (in hundred thousands)
 CALCULATING ELASTICITY OF SUPPLY
BETWEEN TWO POINTS

6.00
Wage per hour

5.50 485  475 10 Elasticity of supply

5.00E 
(475)
 475 
.021
 .2
B between A and B: % Q
5  4.50
E
S
.50 .105

4.50 (4.50) 4.50

C % P
A
4.00
3.50
3.00

0
470 480 490
Quantity of workers
CALCULATING ELASTICITY AT A POINT

Let us now turn to a method of

calculating the elasticity at a specific
point, rather than over a range or an
arc.
CALCULATING ELASTICITY AT A POINT

To calculate elasticity at a point,

determine a range around that point
and calculate the arc elasticity.
CALCULATING ELASTICITY AT A POINT

10 (28 - 20)
9
E =
20  0.66
8 at A
(5 - 3)
7
3
Price

6 C
5
A
4
B
3
2
1
20 24 28 40 Quantity
 CALCULATING ELASTICITY AT A POINT
To calculate elasticity at a point determine a range around
10 that point and calculate the 8arc elasticity.
28  20
9 Eat A 
(20)
 20 
.33
 .66
53 2
8 (3) 3
.5

7
Price

6 C
5
A
4
B
3
2
1
20 24 28 40
Quantity
 ELASTICITY AND DEMAND CURVES

Two important points to consider:

Elasticity is related (but is not the same
as) slope.
Elasticity changes along straight-line
demand and supply curves.
 CALCULATING ELASTICITY AT A POINT

10 Demand
9 Supply
8 EA = 2.33
A
7
6
Price

D
5 ED = 0.86
4
3 C E = 0.75 EB = 0.11
2 C
B
1
6 12 18 24 30 36 42 48 54 60 Quantity
 ELASTICITY AND DEMAND CURVES

Two important points to consider:

Elasticity is related (but is not the same
as) slope.
Elasticity changes along straight-line
demand and supply curves.
 ELASTICITY IS NOT THE SAME AS SLOPE

The steeper the curve at a given point,

the less elastic is supply or demand.
There are two limiting examples of this.
 ELASTICITY IS NOT THE SAME AS SLOPE

When the curves are flat, we call the curves

perfectly elastic.

• The quantity changes enormously in

response to a proportional change in
price (E = ¥).
 ELASTICITY IS NOT THE SAME AS SLOPE

When the curves are vertical, we call the curves

perfectly inelastic.

• The quantity does not change at all in

response to an enormous proportional
change in price (E = 0).
PERFECTLY INELASTIC DEMAND CURVE

Perfectly inelastic
demand curve
Price

0
Quantity
 PERFECTLY ELASTIC DEMAND CURVE
Price

Perfectly elastic
demand curve

0
Quantity
DEMAND CURVE
SHAPES AND ELASTICITY
Perfectly Elastic Demand Curve
 The demand curve is horizontal, any change in price can
and will cause consumers to change their consumption.

Perfectly Inelastic Demand Curve

 The demand curve is vertical, the quantity demanded is
totally unresponsive to the price. Changes in price have no
effect on consumer demand.

In between the two extreme shapes of demand curves

are the demand curves for most products.
DEMAND CURVE
SHAPES AND ELASTICITY
 ELASTICITY CHANGES ALONG STRAIGHT-LINE
CURVES

Elasticity is not the same as slope.

Elasticity changes along straight line
supply and demand curves–slope
does not.
 ELASTICITY ALONG A DEMAND CURVE
Ed = ∞
Elasticity declines along
10 demand curve as we move
9 toward the quantity axis
8 Ed > 1
7
6
Price

Ed = 1
5
4
3 Ed < 1
2
1 Ed = 0
0 1 2 3 4 5 6 7 8 9 10 Quantity
The Price Elasticity Of Demand Along A
Straight-line Demand Curve
DETERMINANTS OF THE
PRICE ELASTICITY OF DEMAND
The degree to which the price elasticity of
demand is inelastic or elastic depends on:
 How many substitutes there are
 How well a substitute can replace the good or
service under consideration
 The importance of the product in the
consumer’s total budget
 The time period under consideration