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1. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
C
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Prepared by: Fernando Quijano
and Yvonn Quijano
Elasticity

2. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Elasticity
• Elasticity is a general concept that can be used
to quantify the response in one variable when
another variable changes.
elasticity of A with respect to B
A
B

%
%


• Price elasticity of demand measures how
responsive consumers are to changes in the
price of a product.

3. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Price Elasticity of Demand
• Measures the responsiveness of demand to
changes in price.
• It is the ratio of the percentage change in
quantity demanded to the percentage change
in price.
• Its value is always negative, but stated in
absolute terms.
• The value of the line of the slope and the
value of elasticity are not the same.
price elasticity of demand
% change in quantity demanded
change in price

%

4. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Response to
Price Changes
Responsive
Unresponsive
Proportional
Value of
Elasticity
 > |1|
 < |1|
 = |1|
Characteristics of Demand Elasticity
Type of
Demand
Elastic
Inelastic
Unitary elastic
Magnitudes of
Change
%Qd > %P
%Qd < %P
%Qd = %P
Type of
Elasticity
Elastic
Inelastic
Substitutes
Available
Many
Few

5. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Type of Demand
Elastic
Inelastic
Inclination
Relatively Flat
Relatively Steep
Shape of Demand According to Elasticity

6. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Extreme Elasticities
Elasticity Value
 = 0
 = 
Type of Elasticity
Perfectly Inelastic
Perfectly Elastic
Substitutes Available
None
Infinite

7. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Hypothetical Demand Elasticities
for Four Products
PRODUCT
% CHANGE
IN PRICE
(%P)
Insulin 10% 0% 0 Perfectly inelastic
Basic telephone service 10% -1% -0.1 Inelastic
Beef 10% -10% -1 Unitary elastic
Bananas 10% -30% -3 Elastic
% CHANGE IN
QUANTITY
DEMANDED
(%Qd)
ELASTICITY
(%Qd/%P)
Hypothetical Demand Elasticities for Four Products

8. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Calculating Percentage Changes
• Elasticity is a ratio of percentages, and it involves
computing percentage changes.
% change in quantity demanded x 100%
2


Q Q
Q
1
1
price elasticity of demand 


 
100%
333%
30
.
.
• Using the values on the graph to
compute elasticity, then:
% change in price x 100%
2


P P
P
1
1

9. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Computing the Value of Elasticity
%
%
( ) /
( ) /


Q
P
Q Q
Q Q
P P
P P
d





2 1
1 2
2 1
1 2
2
100%
2
x
x 100%
%
%
( ) /
( ) /
. .


Q
P
d





  
10 5
5 10 2
100%
2 3
3 2 2
5
75 167
x
x 100%
x 100%
-1
2.5
x 100%
=
66.7%
-40.0%
• The midpoint formula to
compute elasticity is:

10. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Interpreting the Value of Elasticity
• When  = 0.2, a 10% increase in price
leads to a 2% decrease in quantity
demanded.
• When  = 2.0, a 10% increase in price
leads to a 20% decrease in quantity
demanded.
Here is how to interpret two different
values of elasticity:

11. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Elasticity Changes along a Straight-Line
Demand Curve
• Price elasticity of demand
decreases as we move
downward along a linear
demand curve.
• Demand is elastic on the
upper part of the demand
curve and inelastic on the
lower part.

12. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Elasticity Changes along a Straight-
Line Demand Curve
• Along the elastic range,
elasticity values are
greater than one.
 6.4
 .29
• Along the inelastic range,
elasticity values are less
than one.

13. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Elasticity and Total Revenue
• When demand is inelastic, price and total revenues are directly
related. Price increases generate higher revenues.
• When demand is elastic, price and total revenues are indirectly
related. Price increases generate lower revenues.
Type of
demand Value of Ed
Change in quantity
versus change in
price
Effect of an
increase in
price on total
revenue
Effect of a
decrease in price
on total revenue
Elastic Greater than
1.0
Larger percentage change
in quantity
Total revenue
decreases
Total revenue
increases
Inelastic Less than 1.0 Smaller percentage
change in quantity
Total revenue
increases
Total revenue
decreases
Unitary
elastic
Equal to 1.0 Same percentage change
in quantity and price
Total revenue
does not change
Total revenue does not
change

14. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Determinants of Demand Elasticity
• Availability of substitutes --
demand is more elastic when there
are more substitutes for the product.
• Importance of the item in the
budget -- demand is more elastic
when the item is a more significant
portion of the consumer’s budget.
• Time frame -- demand becomes
more elastic over time.

15. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Other Important Elasticities
• Income elasticity of demand – measures the
responsiveness of demand to changes in
income.
income elasticity of demand
% change in quantity demanded
change in income

%

16. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Other Important Elasticities
• Cross-price elasticity of demand: A
measure of the response of the quantity of one
good demanded to a change in the price of
another good.
cross- price elasticity of demand
% change in quantity of demanded
change in price of

Y
X
%

17. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Other Important Elasticities
• Elasticity of supply: A measure of the
response of quantity of a good supplied to a
change in price of that good. Likely to be
positive in output markets.
elasticity of supply
% change in quantity supplied
change in price

%

18. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Other Important Elasticities
• Elasticity of labor supply: A measure of the
response of labor supplied to a change in the
price of labor.
elasticity of labor supply
% change in quantity of labor supplied
change in the wage rate

%