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Econ 3

Elasticity is a measure of how responsive quantity demanded or supplied is to changes in its determinants like price. There are different types of elasticity including price elasticity of demand, income elasticity of demand, cross price elasticity of demand, and elasticity of supply. Elasticity is calculated as the percentage change in one variable divided by the percentage change in another variable.

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20 views22 pages

Econ 3

Elasticity is a measure of how responsive quantity demanded or supplied is to changes in its determinants like price. There are different types of elasticity including price elasticity of demand, income elasticity of demand, cross price elasticity of demand, and elasticity of supply. Elasticity is calculated as the percentage change in one variable divided by the percentage change in another variable.

Uploaded by

abubacarjrs
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Elasticity

Elasticity
Elasticity
• A measure of responsiveness of one variable to a certain change of another
variable

• In economics, it is a measure of the responsiveness of quantity demanded or


quantity supplied to one of its determinants

• A measure of how much buyers and sellers respond to changes in market


conditions (e.g. changes in the price of the goods, income of the consumers or
prices of related goods)
Elasticity of Demand
Elasticity of Demand measures how much demand changes to changes in its
determinants
A. Price Elasticity of Demand
• a measure of how much the quantity demanded of a good responds to a
change in the price of that good
• computed as the percentage change in quantity demanded divided by the
percentage change in price
Price Elasticity of Demand

Types of Elasticity 2. Inelastic


1. Elastic • If the percentage change in quantity
• If the percentage change in quantity demanded is less than the
demanded is greater than the percentage change in price
percentage change in price
• Qd is less responsive to the change
• Qd is more responsive to the change in in price
price
Price Elasticity of Demand

3. Unitary or Unit Elastic 4. Perfectly Elastic


• If the percentage change in • If the percentage change in quantity demanded
quantity demanded is equal to the is infinite with the change in price
percentage change in price
• Qd responds infinitely to the change in price
• Qd responds similarly to the
change in price 5.Perfectly Inelastic
• If the percentage change in quantity demanded
is zero with the change in price

• Qd is unresponsive to the change in price


Price Elasticity of Demand

Computing Elasticities
Examples: From point A to point B

From point F to point E:


=
Demand Curves and Price Elasticities
Determinants of Price Elasticity of Demand

1. Availability of Close Substitutes 2. Definition of the Market


• Narrowly defined markets- elastic demand
• More close substitutes-elastic
demand • Broadly defined markets- inelastic demand
• It is easier for consumers to switch 3. Nature of the Goods
from that good to others • Necessity- inelastic demand
• Less/no substitute- inelastic demand • Luxury goods- elastic demand
Ex . Eggs 4. Time Dimension
• Short-run- inelastic demand
• Long-run- elastic demand
Total Revenue and the Price Elasticity of Demand

Total Revenue
• The total amount paid by buyers, and
received as revenue by sellers
• Equals the area of the box under the
demand curve
•
Total Revenue and the Price Elasticity of Demand

Q: How total revenue changes when price changes?


1. Inelastic demand
• With an inelastic demand
curve, an increase in the price
leads to a decrease in quantity
demanded that is
proportionately smaller.
• A price increase from P1 to P3
increases TR from P100 to
P240.
• Therefore, total revenue
increases.
Total Revenue and the Price Elasticity of Demand

2. Elastic demand
• With an elastic demand curve, an
increase in the price leads to a
decrease in quantity demanded
that is proportionately larger.
• A price increase from P4 to P5
decreases TR from P200 to P100.
• Therefore, total revenue
decreases.
Income Elasticity of Demand

B. Income Elasticity of Demand


• Measures how the quantity demanded changes as consumer income
changes.
• Computed as the percentage change in quantity demanded divided by the
percentage change in income
Income Elasticity of Demand

Types of Goods
1. Normal goods
• Higher income raises quantity demanded
• Quantity demanded and income move in the same direction
• Positive income elasticities
2. Inferior Goods
• Higher income lowers the quantity demanded
• Quantity demanded and income move in opposite directions
• Negative income elasticities
Cross-Price Elasticity of Demand

C. Cross-Price Elasticity of Demand ()


• Measure how the quantity demanded of one good changes as the price
of another good changes
• It is calculated as the percentage change in quantity demanded of one
good, say X, divided by the percentage change in the price of the other
good, say Y.
Cross-Price Elasticity of Demand

Types of Goods
1. Substitutes
• The cross-price elasticity () is positive.
• The price of good and the quantity of good demanded move in the
same direction
2. Complements
• The cross-price elasticity () is negative
• The price of good and the quantity of good demanded move in
opposite direction
Elasticity of Supply

Price Elasticity of Supply


• A measure of how much the quantity supplied of a good responds to a
change in the price of that good
• Computed as the percentage change in quantity supplied divided by
the percentage change in price
Elasticity of Supply
Types of Elasticity
1. Elastic
• Supply of a good is said to be elastic if the quantity supplied responds
substantially to changes in the price.

2. Inelastic
• Supply is said to be inelastic if the quantity supplied responds only
slightly to changes in the price

3. Unitary or Unit Elastic


• If the quantity supplied responds similarly to changes in the price
Elasticity of Supply

Types of Elasticity
4. Perfectly Elastic
• If the quantity supplied responds infinitely to changes in the price

• The supply curve is horizontal


5. Perfectly Inelastic
• If the quantity supplied is unresponsive to changes in the price

• The supply curve is vertical


Elasticity of Supply

a. Perfectly Inelastic Supply b. Inelastic Supply


Elasticity of Supply

c. Unit-elastic Supply
Elasticity of Supply

d. Elastic Supply e. Perfectly Elastic Supply


Elasticity of Supply

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