This document provides an overview of elasticity concepts including definitions of price elasticity of demand, income elasticity, and cross price elasticity. It discusses how price elasticity of demand is calculated using the percentage change in quantity demanded over the percentage change in price. Demand can be elastic, inelastic, or unit elastic based on this calculation. Factors that affect elasticity include availability of substitutes, necessity of the good, total expenditure, and adjustment time. The relationship between price changes, elasticity, and changes in total revenue is also covered.

1. CENTRE FOR POLICY STUDIES
UNIVERSITY COLLEGE CORK
EC2204
TUTORIAL 3
WS 29102012
Academic Year: 2012/2013
Instructors: Brenda Lynch and P.J. Hunt
Contact:
brendalynch@ucc.ie or p.hunt@ucc.ie

2. Elasticity
Elasticity is a measures of responsiveness.
Some Definitions
Price elasticity of Demand (Ep). The
responsiveness in demand for a good to a
change in price of that good.

3. Income elasticity (Ei). The responsiveness in
demand and supply for a good to a change in
income. (Inferior / normal good).
Cross price elasticity. The responsiveness in
demand for one good caused by a change in
price of another good. (Complement /
Substitute good).

4. Price elasticity of Demand (Ep)
Ep is calculated using the average change in
price and demand.
Formula: Ep is measured by the formula
% ∆ QD
% ∆P
• Example:
• A small hot-dog stand charges €3.10 per hot-
dog and sell 9 per hour (the original point on
the demand curve). The price falls to €2.90
and demand rises to 11 per hour (the new
point on the demand curve).

5. (-€0.20 / €3.10) * 100 = - 6.45% = % ∆ P
(2/9) * 100 = 22.2%
So using the Ep formula
% ∆ QD
% ∆P
= 22.2%/ - 6.45%
= - 3.44%
In English; A 1% change in P causes a 3.44%
change in Qd

6. Three categories:
Ep > -1 (demand is elastic, big response)
Ep < -1 (demand is inelastic, small response)
Ep = -1 (demand is unit elastic)
What affects elasticity?
Substitutes: The closer the substitute for a
good or service, the more elastic the demand
for it. Is petrol elastic or inelastic?

7. Necessities tend to have inelastic demand (bread,
heating oil, electricity) luxury goods tend to be elastic
(4 by 4’s, long haul holidays, private swimming pools)
Total expenditure on the good: How much is it
worth looking for substitutes? Example; a new
car and a packet of crisps. If the price of both
doubled which item would most likely suffer a
sizeable drop in demand?

8. Adjustment time (short run and the long run).
The greater the time lapse since a price change
the greater the chance of finding effectives
substitutes and the more elastic is demand.
Home heating oil.
Total Revenue (TR) and Price Elasticities
TR from the sale of a good equals the price of
the good multiplied by the quantity sold or....
TR = P * Q

9. Questions
If a price cut increases TR demand is
__________. Why?
If a price cut decreases TR demand is
__________. Why?
If a price cut leaves TR unchanged demand
is __________. Why?