The document discusses the concept of elasticity in economics. It defines elasticity as measuring the responsiveness of one variable to changes in another. It then focuses on price elasticity of demand, explaining that it measures the responsiveness of quantity demanded to changes in price. It provides formulas for calculating price elasticity of demand using percentage changes in quantity and price. It also discusses other concepts like determinants of demand elasticity and different types of elasticities that can be measured.

1. Elasticity slide 1
ELASTICITY
Elasticity is the concept economists use to
describe the steepness or flatness of curves or
functions.
In general, elasticity measures the responsiveness
of one variable to changes in another variable.

2. Elasticity slide 2
PRICE ELASTICITY OF
DEMAND
Measures the responsiveness of quantity
demanded to changes in a good’s own price.
The price elasticity of demand is the percent
change in quantity demanded divided by the
percent change in price that caused the change
in quantity demanded.

3. Elasticity slide 3
FACTS ABOUT ELASTICITY
It’s always a ratio of percentage changes.
That means it is a pure number -- there are no units
of measurement on elasticity.
Price elasticity of demand is computed along a
demand curve.
Elasticity is not the same as slope.

4. Value Meaning
Ed = 0 Perfectly inelastic
1 > Ed > 0 Relatively inelastic.
Ed = 1 Unit (or unitary) elastic.
∞ > Ed > 1 Relatively elastic.
Ed = ∞ Perfectly elastic

5. Elasticity slide 5
LOTS OF ELASTICITIES!
THERE ARE LOTS OF WAYS TO COMPUTE
ELASTICITIES. SO BEWARE! THE DEVIL IS IN
THE DETAILS.
MOST OF THE AMBIGUITY IS DUE TO THE MANY
WAYS YOU CAN COMPUTE A PERCENTAGE
CHANGE. BE ALERT HERE. IT’S NOT
DIFFICULT, BUT CARE IS NEEDED.

6. Elasticity slide 6
What’s the percent increase in price here
because of the shift in supply?
pE = $2
QE
S
D
Q
price
S'
pE = $2.50
CIGARETTE MARKET

7. Elasticity slide 7
IS IT:
A) [.5/2.00] times 100?
B) [.5/2.50] times 100?
C) [.5/2.25] times 100?

8. Elasticity slide 8
From time to time economists have used ALL of these
measures of percentage change --
including the “Something else”!
Notice that the numerical values of the percentage
change in price is different for each case:
Go to hidden slide

9. Elasticity slide 10
Economists usually use the “midpoint”
formula (option C), above) to compute
elasticity in cases like this in order to
eliminate the ambiguity that arises if we
don’t know whether price increased or
decreased.

10. Elasticity slide 11
Using the Midpoint Formula
Elasticity =
% change in p = times 100.
% change in p =
For the prices $2 and $2.50, the % change in p is
approx. 22.22 percent.
P
in
change
%
Q
in
change
%
P
average
P
in
change
100
)
P
P
(
MEAN



11. Elasticity slide 12
What’s the percent change in Q due to the
shift in supply?
pE = $2.00
QE = 10
S
D
Q (millions)
price
S'
pE’ = $2.50
CIGARETTE MARKET
QE’ = 7

12. Elasticity slide 13
Use the midpoint formula again.
Elasticity =
% change in Q =
% change in Q =
For the quantities of 10 and 7, the % change in Q is
approx. -35.3 percent. (3/8.5 times 100)
P
in
change
%
Q
in
change
%
Q
average
Q
in
change
100
)
Q
Q
(
MEAN



13. Elasticity slide 14
NOW COMPUTE ELASTICITY
% change in p = 22.22 percent
% change in Q = -35.3 percent
E = -35.3 / 22.22 = -1.6 (approx.)

14. Elasticity slide 15
But you can do the other options as well:
A) If you use the low price, and its corresponding
quantity, as the base values, then elasticity = 1.2
B) If you use the high price, and its corresponding
quantity, as the base values, then elasticity = 2.1
(approx.)
C) And the midpoint formula gave 1.6 (approx.)
SAME PROBLEM...DIFFERENT ANSWERS!!!

15. Elasticity slide 16
MORE ELASTICITY
COMPUTATIONS
Q
P
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14
Compute elasticity between
prices of $9 and $8.

16. Elasticity slide 17
The % change in Q =
The % change in P =
Therefore elasticity =
USE THE MIDPOINT FORMULA.
Go to hidden slide

17. Elasticity slide 20
Now we try different prices
Q
P
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14
Compute elasticity between
prices of $3 and $2.

18. Elasticity slide 21
The % change in Q =
The % change in P =
Therefore elasticity =
Go to hidden slide

19. Elasticity slide 24
ELASTICITY IS NOT SLOPE!
Q
P Note that elasticity is different
at the two points even though
the slope is the same.
(Slope = -1)
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14
E = -5.67
E = -.33

20. Elasticity slide 25
TERMS TO LEARN
Demand is ELASTIC when the numerical value of
elasticity is greater than 1.
Demand is INELASTIC when the numerical value of
elasticity is less than 1.
Demand is UNIT ELASTIC when the numerical value
of elasticity equals 1.
NOTE: Numerical value here means “absolute value.”

21. Elasticity slide 26
LIKE THIS!
Q
P
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14
Demand is elastic here.
Demand is inelastic here.

22. Elasticity slide 27
There is an important relationship between what
happens to consumers’ spending on a good and
elasticity when there is a change in price.
Spending on a good = P Q.
Because demand curves are negatively sloped, a
reduction in P causes Q to rise and the net effect
on PQ is uncertain, and depends on the elasticity
of demand.

23. Elasticity slide 28
Q
P
At P = $9, spending is $9 (= 1 times $9).
At P = $8, spending is $16 ( = 2 times $8).
When price fell from $9 to $8, spending rose. Q must
haveincreased by a larger percent than P decreased.
So...
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14
Demand is elastic here.

24. Elasticity slide 29
Q
P
At P = $3, spending is $21 (= 7 times $3).
At P = $2, spending is $16 ( = 8 times $2).
When price fell from $3 to $2, spending fell. Q must have
increased by a smaller percent than P decreased. So...
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14
Demand is inelastic here.

25. Elasticity slide 30
There is an easy way to tell whether demand is elastic or
inelastic between any two prices.
If, when price falls, total spending increases, demand is
elastic.
If, when price falls, total spending decreases, demand is
inelastic.

26. Elasticity slide 31
But total spending is easy to see using a
demand curve graph:
Q
P
The shaded area is P times Q,
or total spending when P = $9.
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14

27. Elasticity slide 32
Q
P
The shaded area is P times Q
or total spending when P = $8.
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14

28. Elasticity slide 33
Q
P
Total spending is higher at the price
of $8 than it was at the price of $9.
= loss in TR
due to fall in P
= gain in TR due to
rise in Q
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14

29. Elasticity slide 34
Q
P
The shaded area is total
spending (total revenue of
sellers) when P = $3.
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14

30. Elasticity slide 35
Q
P
Total revenue of sellers (total
spending by buyers) falls when
price falls from $3 to $2.
QUANTITY PRICE
0 10
1 9
2 8
3 7
4 6
5 5
6 4
7 3
8 2
9 1
10 0
0
2
4
6
8
10
12
14
0 2 4 6 8 10 12 14

31. Elasticity slide 36
Here’s a convenient way to think of the
relative elasticity of demand curves.
p
Q
p*
Q*
relatively more inelastic
at p*
relatively more elastic
at p*

32. Elasticity slide 37
Examples of elasticity
A labor union negotiates a higher wage. How does
this affect the incomes of affected workers as a
group?
MSU decides to raise the price of football tickets.
How is income from the sale of tickets affected?
Airlines propose to raise fares by 10%. Will the
boost increase revenues?
MSU is considering raising tuition by 7%. Will the
increase in tuition raise revenues of MSU?

33. Elasticity slide 38
MORE ...

34. Elasticity slide 39
The answers to all of these questions depend on
the elasticity of demand for the good in
question. Be sure you understand how and
why!

35. Elasticity slide 40
DETERMINANTS OF DEMAND
ELASTICITY
The more substitutes there are available for a good,
the more elastic the demand for it will tend to be.
[Related to the idea of necessities and luxuries.
Necessities tend to have few substitutes.]
The longer the time period involved, the more elastic
the demand will tend to be.
The higher the fraction of income spent on the good,
the more elastic the demand will tend to be.

36. Elasticity slide 41
OTHER ELASTICITY MEASURES
In principle, you can compute the elasticity
between any two variables.
Income elasticity of demand
Cross price elasticity of demand
Elasticity of supply

37. Elasticity slide 42
Each of these concepts has the expected definition.
For example, income elasticity of demand is the
percent change in quantity demand divided by a
percent change income:
EINCOME =
Income elasticity of demand will be positive for
normal goods, negative for inferior ones.
I
in
change
%
Q
in
change
%

38. Elasticity slide 43
Often an assignment or a test will ask you the
follow up question "Is the good a luxury
good,
a normal good,
or an inferior good between the income range of
SDG 40,000 and SDG 50,000?
To answer that uses the following rule of
thumb:

39. Elasticity slide 44
If IEoD > 1 then the good is a Luxury Good and
Income Elastic
If IEoD < 1 and IEOD > 0 then the good is a
Normal Good and Income Inelastic.
If IEoD < 0 then the good is an Inferior Good

40. Cross Elasticity of Demand
The cross price elasticity of demand
(CPED)(XED) measures the responsiveness
of changes in the quantity demanded to
changes in the price of a different good.
Elasticity slide 45

41. It is calculated using the following
formula;

42.  XED=
P
Q
Q
P




43. Example:
 XED Pepsi with respect to cola
 A is the subject of this study
 Q Demanded (Pepsi) (A)
P ( Cola) (B)
1000
1
1500
2

44. C
P
P
C
P
Q
Q
P





45.  =
2
1
1
500
1000
1



46. Sign and size
 Substitute goods are alternative. Therefore,
XED will be positive,
 The weak substitutes like tea and coffee will
have a low XED. ( near from zero)
 Tesco bread and Sainsburys bread are close
substitutes so XED is higher. (a way from
zero)


47.  Complements goods;
 These are goods which are used
together, therefore XED is negative.
 If the price of DVD players fall, then
there will be an increase in demand
for DVD disks,

48. When XED = 0
It means that there is no relationship
between the two goods under study