Elasticity measures the responsiveness of quantity demanded or supplied to changes in factors like price. Price elasticity of demand measures how much quantity demanded changes with price changes. Demand can be elastic, inelastic, unit elastic, perfectly elastic, or perfectly inelastic depending on its elasticity value. Price elasticity of supply also measures how quantity supplied responds to price changes. Supply can be inelastic, unit elastic, elastic, perfectly inelastic, or perfectly elastic. Income elasticity measures responsiveness of demand to income changes.

1. Elasticity and
its Application

3. Elasticity
• A measure of how much buyers and sellers respond
to changes in market conditions
• A measure of the responsiveness of quantity
demanded or quantity supplied to a change in one
of its determinants

4. Price Elasticity of Demand
• Measures how much the quantity demanded
responds to a change in price.

5. Factors Influencing PED
• Availability of Close Substitute
• Necessities vs. Luxuries
• Definition of Market
• Time Horizon

6. Computing the PED
Price Elasticity of Demand = % ∆ Qd
% ∆P
PED = 20% / 10% = 2

7. Midpoint Method
• Price elasticity between two points on a demand curve
Ex. Point A: P=$4 Q=120
Point B: P=$6 Q=80
$6
$5
$4
80 100 120
A (6-4)/ 5 X 100 = /40%/
B (4-6)/ 5 X 100 = /40%/

8. Variety of Demand Curves
• Elastic- when elasticity is greater than 1.
• Inelastic-when elasticity is less than 1.
• Unit Elastic- when elasticity is equal to 1.
• Perfectly elastic- when elasticity is infinite.
• Perfectly inelastic- when elasticity is 0.

10. demand

11. Inelastic Demand: Elasticity Is Less Than 1
demand

12. Unit Elastic Demand: Elasticity Equals 1
demand

13. Elastic Demand: Elasticity Is Greater Than 1
demand

14. Perfectly elastic demand: Elasticity equals
infinity
demand

15. Total Revenue and the PED
• amount paid by the buyers and received by the sellers.
(PxQ)
a. The Case of Inelastic Demand
Ex. Consider rice as an inelastic demand. An increase in price
leads to a decrease in quantity demanded that is
proportionately smaller

16. $5
$4
90 100

17. $5
$4
70 100
b.The Case of Elastic Demand
The increase in price leads to a decrease in quantity demanded that is
proportionately larger.

18. Elasticity and TR along a linear demand
curve
•The slope of a linear demand curve is constant
but its elasticity is not.

19. Price Quantity
TR
(PxQ)
%Change in
Price
% Change in
Quantity
Elasticity Description
7 0 0 15 200 13.0 Elastic
6 2 12 18 67 3.7 Elastic
5 4 20 22 40 1.8 Elastic
4 6 24 29 29 1.0 Unit elastic
3 8 24 40 22 0.6 Inelastic
2 10 20 67 18 0.3 Inelastic
1 12 12 200 15 0.1 Inelastic
0 14 0 Inelastic

20. Elasticity is
larger than
1
Elasticity is
smaller than
1

21. Income Elasticity of demand
• Measures how the quantity demanded changes as consumer income
changes.
• = %∆Qd/%∆Y
Cross Price Elasticity of Demand
-- measures how the quantity demanded of one good respond to a
change in the price of another good.
= %∆Qd of good 1
%∆P of good 2

22. The Elasticity of Supply
DETERMINANTS
 Flexibility of Sellers
Time Period

23. Price Elasticity of Supply
• Measures how much the quantity supplied responds
to changes in the price
• = %∆ Quantity Supplied
%∆ in Price

24. (a) Perfectly Inelastic Supply: Elasticity
Equals 0
supply

25. Supply
(b) Inelastic Supply: Elasticity Is
Less Than 1

26. supply
c) Unit Elastic Supply: Elasticity Equals 1

27. (d) Elastic Supply: Elasticity Is Greater
Than 1
supply

28. Supply
Perfectly Elastic Supply