Microeconomics Unit 4: Elasticity

Alan Clarke

2025

Alan Clarke Microeconomics Unit 4: Elasticity 2025 1 / 24

Elasticity

Elasticity measures how sensitive one variable is to changes in another

We will only deal with one elasticity in this course: the price elasticity of demand
This expresses how sensitive quantity demanded is to changes in the price of the good

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Elasticity
Point Elasticity

Elasticity measures the relative change in quantity demanded and price

We therefore use the percentage change, not the units or rands

%∆Q
εp =
%∆P

The higher the elasticity, the larger the change in quantity for a given change in price
This formula is called the point elasticity of demand

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Elasticity
Point Elasticity

The formula for percentage change from Q1 to Q2 is:

Q2 − Q1
%∆Q = × 100%
Q1

We can substitute this formula into our original elasticity formula

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Elasticity
Point Elasticity

%∆Q
εp =
%∆P

Q2 − Q1
× 100%
Q1
=
P2 − P1
× 100%
P1

Q2 − Q1 P1
= ×
Q1 P2 − P1

Q2 − Q1 P1 ∆Q P
= × or ×
P2 − P1 Q1 ∆P Q
Alan Clarke Microeconomics Unit 4: Elasticity 2025 5 / 24
Elasticity
Point Elasticity

Because a positive change in price will always produce a negative change in quantity,
∆Q/∆P will always be negative
Price and quantity will always be positive, so P/Q will be positive
A negative multiplied by a positive will also always be negative, so εp is always negative
However, we always ignore the negative and give elasticity as a positive value

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Elasticity
P

A
50

B
25

D
Q
0 20 40

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Elasticity
Point Elasticity
To calculate the point elasticity of A, we substitute the values from the graph as follows
Q2 − Q1 P1
εp = ×
P2 − P1 Q1

40 − 20 50
= ×
25 − 50 20

10 50
= ×
−25 20

2 5
= ×
−5 2

=1 (ignore the minus)

Alan Clarke Microeconomics Unit 4: Elasticity 2025 8 / 24
Elasticity
Point Elasticity
To calculate the point elasticity of B, we substitute the values from the graph as follows
Q2 − Q1 P1
εp = ×
P2 − P1 Q1

20 − 40 25
= ×
50 − 25 40

−20 25
= ×
25 40

−4 5
= ×
5 8

= 0.5 (ignore the minus)

Alan Clarke Microeconomics Unit 4: Elasticity 2025 9 / 24
Elasticity
Arc Elasticity

We see that the elasticity between point A and B depends on which point you use to
calculate the elasticty
There is another formula that will ensure that the answer for elasticity over a given
segment on the demand curve is the same no matter which point we use to calculate it
This formula is called the arc elasticity of demand

Alan Clarke Microeconomics Unit 4: Elasticity 2025 10 / 24

Elasticity
Arc Elasticity

The arc elasticity of demand uses the average of the two quantities and the two prices in
calculating the relative change:

Q2 − Q1
Relative change in Q = × 100%
(Q1 + Q2 )/2

Q2 − Q1
= 1
× 100%
2 (Q1 + Q2 )

We can substitute this into the elasticty equation as before

Alan Clarke Microeconomics Unit 4: Elasticity 2025 11 / 24

Elasticity
Arc Elasticity

Q2 − Q1
1
× 100%
2 (Q1 + Q2 )
εa =
P2 − P1
1
× 100%
2 (P1 + P2 )

1
Q2 − Q1 2 (P1 + P2 )
= 1
×
2 (Q1 + Q2 )
P2 − P1

Q2 − Q1 P1 + P2
= ×
P2 − P1 Q1 + Q2

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Elasticity
P

A
50

B
25

D
Q
0 20 40

Alan Clarke Microeconomics Unit 4: Elasticity 2025 13 / 24

Elasticity
Arc Elasticity
Solving for the arc elasticity between A and B:
Q2 − Q1 P1 + P2
εa = ×
P2 − P1 Q1 + Q2

40 − 20 25 + 50
= ×
25 − 50 20 + 40

20 75
= ×
−25 60

4 5
= ×
−5 4

=1
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Elasticity
Inelastic demand

When elasticity is less than one, a large change in price will result in a small change in
quantity
We call this inelastic demand
We can also illustrate this relationship on a graph

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Elasticity
P

p2

εp < 1

p1

D
q2 q1 Q
0

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Elasticity
Perfectly Inelastic demand

If we were to decrease this elasticity down to zero, we would see that a large change in
price results in no change in quantity
We call this perfectly inelastic demand
We can illustrate this relationship on a graph

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Elasticity
P
D

p2

εp = 0

p1

q Q
0

Alan Clarke Microeconomics Unit 4: Elasticity 2025 18 / 24

Elasticity
Elastic demand

The opposite of inelastic demand is called elastic demand

If the elasticity is larger than one, we would see that even a small change in price results
in a large change in quantity
We can illustrate this relationship on a graph

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Elasticity
P

p2 εp > 1

p1
D

q2 q1 Q
0

Alan Clarke Microeconomics Unit 4: Elasticity 2025 20 / 24

Elasticity
Elastic demand

If we keep increasing elasticity towards infinity, we will see that eventually there is only
one price for all quantities
This is perfectly elastic demand
We can illustrate this relationship on a graph

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Elasticity
P

εp = ∞

p D

Q
0

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Elasticity
Unit demand

We consider one special case of elasticity where elasticity is exactly equal to 1 all along
the demand curve
Because elasticity is not normally the same along a straight demand curve, we must use a
special curved demand curve to illustrate this case
This is called unit elastic demand

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Elasticity
P

p2
εp = 1
40%

p1

40%

q2 q1 Q
0

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