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Elasticity

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Elastic Demand When % Change in Quantity Demanded > %Change in Price

Unit Elastic Demand When % Change in QuantityDemanded = % Change in Price

Inelastic Demand When % Change in Quantity Demanded 1, then the % Change in Qd > % Change is Price anddemand is said to be elastic

An increase in price will reduce total revenue

A decrease in price will increase total revenue

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Significance of Price Elasticity of Demand

If Ep < 1, then the % change in Qd < % change in price, anddemand is said to be inelastic

An increase in price will increase total revenue

A decrease in price will decrease total revenue

If Ep = 1, then the % change in Qd = % change in Price, anddemand is said to be unit elastic

An increase in price will have no impact on total revenue

A decrease in price will have no impact on total revenue

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Price Elasticity of Supply

A measure of the extent to which the quantitysupplied of a good changes when the price of the

good changes, and all other influences on sellersplans remain the same (ceteris paribus)

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Price Elasticity of Supply

Perfectly Elastic Supply When the quantity supplied changesby a very large percentage in response to an almost zeroincrease in price

Elastic Supply When the % change in the quantity supplied >

the % change in the price Unit Elastic Supply When the % change in the quantity

supplied = the % change in price Inelastic Supply When the % change in the quantity supplied

is < the % change in price Perfectly Inelastic Supply When the quantity supplied

remains the same as the price changes

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Influences on Price Elasticity of Supply

1. Fixed Production = inelastic price elasticity

2. Time Elapse longer time, > price elasticity

3. Storage Possibilities The better the storability, the more elastic is the price

elasticity of supply

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Computing Price Elasticity of Supply

Percentage change in quantity supplied

Percentage change in price

If Price Elasticity of Supply > 1, Supply is elastic

If Price Elasticity of Supply = 1, Supply is unit elastic

If price elasticity of supply< 1, Supply is inelastic

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Computing Price Elasticity of Supply

Percentage change in quantity supplied

Percentage change in price

If Price Elasticity of Supply > 1, Supply is elastic

If Price Elasticity of Supply = 1, Supply is unit elastic

If price elasticity of supply< 1, Supply is inelastic

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Figure The Price Elasticity of Supply

Copyright2003 Southwestern/Thomson Learning

(a) Perfectly Inelastic Supply: Elasticity Equals 0

$5

4

Supply

Quantity 1000

1. Anincreasein price . . .

2. . . . leaves the quantity supplied unchanged.

Price

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Figure 6 The Price Elasticity of Supply

Copyright2003 Southwestern/Thomson Learning

(b) Inelastic Supply: Elasticity Is Less Than 1

110

$5

100

4

Quantity 0

Price

Supply

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Figure 6 The Price Elasticity of Supply

Copyright2003 Southwestern/Thomson Learning

(c) Unit Elastic Supply: Elasticity Equals 1

125

$5

100

4

Quantity 0

Price

Supply

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Figure 6 The Price Elasticity of Supply

Copyright2003 Southwestern/Thomson Learning

(d) Elastic Supply: Elasticity Is Greater Than 1

Quantity 0

Price

4

100

$5

200

Supply

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Cross Elasticity of Demand

A measure of the extent to which the demand for agood changes when the price of a substitute orcomplement changes, ceteris paribus

% Change in Quantity Demanded

% Change in Price of one of its

substitutes or complements

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Income Elasticity of Demand

A measure of the extent to which the demandfor a good changes when income changes,ceteris paribus

% Change in Quantity Demanded

% Change in Income

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Income Elasticity

Types of Goods Normal Goods Inferior Goods

Higher income raises the quantity demandedfor normal goods but lowers the quantitydemanded for inferior goods.

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Contd..

Goods consumers regard as necessities tendto be income inelastic

Examples include food, fuel, clothing, utilities, andmedical services.

Goods consumers regard as luxuries tend tobe income elastic.

Examples include sports cars, and expensivefoods.

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Income Elasticity of Demand

If income elasticity of demand > 1 the demand forthe good is income elastic

If income elasticity of demand is between

0 and 1, the demand is income inelastic* If income elasticity of demand < 0 the demand isnegative income elastic

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Figure 1The Price Elasticity of Demand

(a) Perfectly Inelastic Demand: Elasticity Equals 0

$54

Quantity

Demand

1000

1. Anincreasein price . . .

2. . . . leaves the quantity demanded unchanged.

Price