The document discusses the concept of elasticity of demand. It defines elasticity of demand as the percentage change in quantity demanded divided by the percentage change in price. An elastic demand means this ratio is greater than 1, an inelastic demand means the ratio is less than 1, and a unit elastic demand means the ratio equals 1. The document then discusses how the slope of a demand curve relates to its elasticity, with flatter curves being more elastic and steeper curves being less elastic. It also introduces the total revenue test for elasticity and other types of elasticity like cross-price and income elasticity.

1. Demand 1
The Demand Curve and “holistic” elasticity
Elasticity measures the change
in QUANTITY DEMANDED as
the PRICE of a Good/Service changes.
In other words, how sensitive are
demanders to changes in prices as to
how much of a good or service they are
willing and able to purchase.
**The Ratio of the Change in Quantity Demanded
To the Change in Price is ALL IMPORTANT**
Elasticity of Demand = %Chg in Qd/%Chg in Price
If this ratio yields a number GREATER THAN 1—Elastic
(the change in Qd is larger than the change in Price)
If this ratio yields a number LESS THAN 1 ---Inelastic
(the change in Qd is less than the change in Price)
If this ratio yields a number EQUAL to 1—Unit Elastic
(the change in Qd is equal to the change in Price)
Price
Quantity Demanded

2. Demand 1
The Demand Curve and “holistic” elasticity
We first want to take a “holistic” look at Demand Curves
to get an overall look at their relative elasticity's.
A Demand Curve that looks like this one we want to
consider “Relatively UNIT ELASTIC”. I say “relatively”
because mathematically it is not precise. Just go with it here.
This implies that the %change in Quantity = the %change in Price
Example: A 10% INCREASE (or Decrease) in PRICE causes
the Quantity Demanded To DECREASE(or increase) by 10%.
Using the formula: 10%/10% = 1
(the change in Qd is equal to the change in Price)
Price
Quantity Demanded

3. Demand 1
Demand 2
The Demand Curve and “holistic” elasticity
Let’s insert another Demand Curve
Demand 2
Compare it to Demand 1. It is FLATTER.
The ratio between change in Qd and Price
is now not so neat and clean (visually NOR relationally)
A flatter Demand Curve implies there is a STRONG
relationship between a change in Price and Quantity
Demanded.
Price
Quantity Demanded

4. Demand 1
Demand 2
The Demand Curve and “holistic” elasticity
Let’s insert another Demand Curve
Demand 2
Compare it to Demand 1. It is FLATTER.
A Demand Curve that looks like this is considered
Relatively ELASTIC.
Demanders are VERY sensitive to Price changes in terms of the
Quantity Demanded.
Small Price changes yield LARGE changes in Quantity Demanded
Whether the price INCREASES or DECREASES.
In our formula, the Numerator is LARGER than the Denominator.
It will yield a number GREATER than 1.
Price
Quantity Demanded

5. Demand 1
Demand 2
Demand 3
The Demand Curve and “holistic” elasticity
Price
Quantity Demanded
Let’s insert another Demand Curve
Demand 3
Compare it to Demand 1. It is STEEPER.
The ratio between change in Qd and Price
is now not so neat and clean (visually NOR relationally)
A Steeper Demand Curve implies there is a WEAK
relationship between a change in Price and Quantity
Demanded.

6. Demand 1
Demand 2
Demand 3
The Demand Curve and “holistic” elasticity
Price
Quantity Demanded
Let’s insert another Demand Curve
Demand 3
Compare it to Demand 1. It is .
A Demand Curve that looks like this is considered
Relatively INELASTIC.
Demanders are NOT very sensitive to Price changes in terms of the
Change in Quantity Demanded.
Large Price changes yield SMALL changes in Quantity Demanded
Whether the price INCREASES or DECREASES.
In our formula, the Numerator is SMALLER than the Denominator.
It will yield a number LESS than 1.

7. Demand 1
Demand 2
Demand 3
The Demand Curve and “holistic” elasticity
Price
Quantity Demanded
Lets look at the extremes.
A HORIZONTAL Demand Curve –”Perfectly ELASTIC”
We see this SEVERAL TIMES IN MICRO!
A VERTICAL Demand Curve (Demand 3)—”Perfectly INELASTIC”
Be ready for either of these in a basic supply and demand question related to
Incidence of Tax.

8. Supply 1
Supply 2
Supply 3
The Demand Curve and “holistic” elasticity
Price
Quantity Demanded
Elasticity of SUPPLY
The same logic in terms of the relationship
between Price and Quantity SUPPLIED
holds for the SUPPLY CURVE.
The only major difference is the SUPPLY curve is
UPWARD SLOPING.
There is a DIRECT relationship between Price and
Quantity Supplied

9. Why is all this important?
• The slope of the Demand and/or Supply
curves will be very important when we look at
the “Incidence of Taxation”.
• Which side, Demand or Supply, will bear the
burden of a tax if levied on the good in
question.
• How changes in Surplus (Consumer and
Producer) are affected with a tax.

10. Demand 1
The Demand Curve and “holistic” elasticity
Price
Quantity Demanded
Now you know how the OVERALL
Shape/Slope of the Demand Curve relates
To Elasticity.
Now, we need to make sure we understand
Embedded WITHIN each Demand Curve are
Smaller units of Elasticity.
We have already covered this so it should be EASY!

11. Total
Revenue
Quantity
Total Revenue Test for Elasticity
On the ELASTIC portion of the
Demand Curve when:
Price DECREASES, Quantity Demanded
INCREASES, Total Revenues INCREASE
We DOWN ALONG the Demand Curve toward the Center
And UP and ALONG the LEFT HALF of Total Revenue Curve (below)
P Qd
TR INCREASE

12. Total
Revenue
Quantity
Total Revenue Test for Elasticity
On the ELASTIC portion of the
Demand Curve when:
Price INCREASES Quantity Demanded
DECREASES Total Revenues DECREASE
We UP ALONG the Demand Curve away from the Center
And DOWN and ALONG the LEFT HALF of Total Revenue Curve (below)
P Qd
TR DECREASE

13. Total
Revenue
Quantity
Total Revenue Test for Elasticity
On the INELASTIC portion of the
Demand Curve when:
Price DECREASES, Quantity Demanded
INCREASES, Total Revenues DECREASE
We move DOWN ALONG the Demand Curve from the center to the lower RIGHT
And DOWN and ALONG the RIGHT HALF of Total Revenue Curve (below)
P Qd
TR DECREASE

14. Total
Revenue
Quantity
Total Revenue Test for Elasticity
On the INELASTIC portion of the
Demand Curve when:
Price INCREASES, Quantity Demanded
DECREASES, Total Revenues INCREASE
We move UP ALONG the Demand Curve from the lower RIGHT to the Center
And UP and ALONG the RIGHT HALF of Total Revenue Curve (below)
P Qd
TR DECREASE

15. Total
Revenue
Quantity
KEY POINT!
Notice that at the inflection point on the Demand
Curve at Unit Elasticity that TOTAL REVENUES ARE AT
THEIR MAXIMUM on the Total Revenue Curve. Read
that again!
P Qd
TR DECREASE

16. Total
Revenue
Quantity
KEY POINT!
We will see this AGAIN when we
calculate MARGINAL REVENUE for
a Monopoly and a Monopolistic
Competitive Market.
When MR = $0 Total Revenues are
Maximized.
P Qd
TR DECREASE

17. Other types of Elasticity you MUST KNOW:
Cross Price Elasticity of Demand: This measures the Change in Quantity Demanded for
Good “B” in response to a change in the Price of Good “A”.
This determines whether the goods in questions are SUBSTITUTES or COMPLEMENTS.
The PLUS or MINUS Sign is IMPORTANT!
Same formula: %change in Quantity Demanded for Good “B”/% change in Price of Good “A”
If the Price of Good “A” INCREASES (+)(or Decreases (-)) and the Quantity Demanded for Good “B”
INCREASES (+) (or Decreases (-)) then the Goods are SUBSTITUTES. (Price of Apples INCREASES then
the Demand for Oranges INCREASES.
If the Price of Good “A” INCREASES (+)(or Decreases (-)) and the Quantity Demanded for Good “B”
DECREASES (-) (or INCREASES (+)) then the Goods are COMPLEMENTS. (Price of Peanut Butter
INCREASES then the Demand Jelly for DECREASES.
**It the Signs BOTH go in the same direction then they are Substitutes
**If the Signs go in opposite directions then they are Complements

18. Other types of Elasticity you MUST KNOW:
INCOME Elasticity of Demand: This measures the Change in Quantity Demanded for
Good “B” in response to a change in INCOME (I).
This determines whether the goods in questions are NORMAL OR INFERIOR.
The PLUS or MINUS Sign is IMPORTANT!
Same formula: %change in Quantity Demanded for Good “A”/% change in INCOME (“I”)
If income INCREASES the Quantity Demanded for Good “A” INCREASES then the goods are NORMAL
GOODS
If income DECREASES and the Quantity Demanded for Good “A” Decreases then the goods are
NORMAL GOODS
If Income DECREASES and the Quantity Demanded for Good “A” INCREASES then the goods are
INFERIOR GOODS
IF Income INCREASES and the Quantity Demanded for Good “A” DECREASES then the goods are
INFERIOR GOODS
**It the Signs BOTH go in the same direction then they are NORMAL GOODS
**If the Signs go in opposite directions then they are INFERIOR GOODS