Elasticity is a measure of the responsiveness of one variable to another. The greater the elasticity, the greater the responsiveness.

1. Prepared by: Milan Padariya

2. Elasticity is a measure of the responsiveness of
one variable to another.
 The greater the elasticity, the greater the
responsiveness.


3. Q. What’s the difference between an economist and
a befuddled old man with Alzheimer’s?
A. The economist is the one with a calculator.

4. Elasticity is a measure of the responsiveness of
one variable to another.
 The greater the elasticity, the greater the
responsiveness.


5. 
The price elasticity of demand is the
percentage change in quantity demanded divided
by the percentage change in price.

6. 
According to the law of demand, whenever the
price rises, the quantity demanded falls. Thus
the price elasticity of demand is always
negative.

Because it is always negative, economists usually
state the value without the sign.

7. 
Price elasticity of demand and supply gives the
exact quantity response to a change in price.

8. 
Demand is elastic if the percentage change in
quantity is greater than the percentage change in
price.
E > 1

9. 
Demand is inelastic if the percentage change in
quantity is less than the percentage change in
price.
E<1

10. 
Elastic Demand means that quantity changes by a
greater percentage than the percentage change in
price.

11. 
Inelastic Demand means that quantity doesn't
change much with a change in price.

12. 
When price elasticity is between zero and -1 we
say demand is inelastic .

When price elasticity is between -1 and
- infinity, we say demand is elastic .

When price elasticity is -1, we say demand is unit
elastic .

13. Percentages allow us to have a measure of
responsiveness that is independent of units.
 This makes comparisons of responsiveness of
different goods easier.


14. 
To determine elasticity divide the percentage
change in quantity by the percentage change in
price.

15. 
The end-point problem – the percentage
change differs depending on whether you view the
change as a rise or a decline in price.

16. 
Economists use the average of the end points to
calculate the percentage change.

17. Price
$26
24
22
20
18
16
14
0
B
C (midpoint)
A
D
Elasticity of demand
between A and B = 1.27
10
12
14
Quantity of software (in hundred thousands)

18. What is the price elasticity of
demand between A and B?
P
$26
$23
$20
B
Midpoint
C
A
10 12 14
Q2–Q1
½(Q2+Q1)
%ΔQ
ED = %ΔP =
P2–P1
½(P2+P1)
10–14
½(10+14)
-.33
= 26–20 = .26 = 1.27
½(26+20)
D
Q
7-18

19. 
Price elasticity of supply is the percentage
change in quantity supplied divided by the
percentage change in
ES =
% change in Quantity Supplied
% change in Price
• This tells us exactly how quantity supplied responds to
a change in price
• Elasticity is independent of units
7-19

20. 
Supply is elastic if the percentage change in
quantity is greater than the percentage change in
price
Elastic supply is when ES > 1
• Supply is inelastic if the percentage change in quantity
is less than the percentage change in price
Inelastic supply is when ES < 1
7-20

21. What is the price elasticity of
supply between A and B?
P
S
$5.00
B
Midpoint
C
$4.75
$4.50
A
476
480.5
485
Q2–Q1
%ΔQ ½(Q2+Q1)
ES = %ΔP = P2–P1
½(P2+P1)
485–476
½(485+476)
0.0187 0.18
= 5–4.50 = 0.105 =
½(5+4.50)
Q
7-21

22. Wage per hour
$6.00
5.50
5.00
4.50
4.00
3.50
3.00
0
A
B
C (midpoint)
Elasticity of supply
between A and B = 0.18
470 480 490
Quantity of workers

23. Q 2 − Q1
%∆ Q
(Q 1 + Q 2 )
E=
=
P2 − P1
%∆ P
1
2 (P1 + P2 )
1
2

24. $26
B
Price
24
22
20
18
16
10 − 14
midpoint
(14 + 10)
Elasticity of demand
between A and B:
−4
− .33
ED =
= 12 =
= 1.27
26 − 20
6
.26
1
23
2 (26 + 20)
1
2
%∆ Q
E=
%∆P
C
A
Demand
14
0
10
12
14
Quantity of software (in hundred thousands)

25. Wage per hour
$6.00
5.50
5.00
4.50
E
4.00 =
3.50
3.00
S
0
A
485 − 475
10
1
(485 + 475 )
.021
2
= 480 =
= .2
5 − 4.50
.50
.105
1
4.75
2 (5 + 4.50)
C
B
470 480 490
Quantity of workers
Elasticity of supply
between A and B:
E=
%∆ Q
%∆ P

26. 
Let us now turn to a method of calculating the
elasticity at a specific point, rather than over a
range or an arc.

27. 
To calculate elasticity at a point, determine a
range around that point and calculate the arc
elasticity.

28. Price
$10
9
8
7
6
5
4
3
2
1
C
A
B
20 24 28
40 Quantity

29. Price
$10
9
8
7
6
5
4
3
2
1
To calculate elasticity at a point determine
a range around that point and calculate
the arc elasticity.
C
E at A =
1
2
A
28 − 20
8
(28 + 20) 24 .33
=
=
= .66
5−3
2
.5
1
4
2 (5 + 3)
B
20 24 28
Quantity
40

30. 
Two important points to consider:
◦ Elasticity is related (but is not the same as) slope.
◦ Elasticity changes along straight-line demand and supply
curves.

31. Price
$10
9
8
7
6
5
4
3
2
1
Demand
A
Supply
EA = 2.33
D
C E = 0.75
C
6
ED = 0.86
EB = 0.11
B
12 18 24 30 36 42 48 54 60 Quantity

32. 
Two important points to consider:
◦ Elasticity is related (but is not the same as) slope.
◦ Elasticity changes along straight-line demand and supply
curves.

33. The steeper the curve at a given point, the less
elastic is supply or demand.
 There are two limiting examples of this.


34. 
When the curves are flat, we call the curves
perfectly elastic.
• The quantity changes enormously in
response to a proportional change in price
(E = ∞).

35. 
When the curves are vertical, we call the curves
perfectly inelastic.
• The quantity does not change at all in
response to an enormous proportional
change in price (E = 0).

36. Price
Perfectly inelastic
demand curve
0
Quantity

37. Price
0
Perfectly elastic
demand curve
Quantity

38. 
Perfectly Elastic Demand Curve
◦ The demand curve is horizontal, any change in price can and
will cause consumers to change their consumption.

Perfectly Inelastic Demand Curve
◦ The demand curve is vertical, the quantity demanded is totally
unresponsive to the price. Changes in price have no effect on
consumer demand.

In between the two extreme shapes of demand curves
are the demand curves for most products.

40. Elasticity is not the same as slope.
 Elasticity changes along straight line supply and
demand curves–slope does not.


41. Ed = ∞
$10
9
8
7
6
5
4
3
2
1
Elasticity declines along
demand curve as we move
toward the quantity axis
Price
Ed > 1
0
Ed = 1
Ed < 1
Ed = 0
1
2
3
4
5
6
7
8
9 10 Quantity

42. The Price Elasticity of Demand Along a
Straight-line Demand Curve

43. 
As a general rule, the more substitutes a good
has, the more elastic is its supply and demand.

44. 
The less a good is a necessity, the more elastic its
demand curve.
• Necessities tend to have fewer substitutes
than do luxuries.

45. 
Demand for goods that represent a large
proportion of one's budget are more elastic than
demand for goods that represent a small
proportion of one's budget.

46. 
Goods that cost very little relative to your total
expenditures are not worth spending a lot of time
figuring out if there is a good substitute.
• It is worth spending a lot of time looking
for substitutes for goods that take a large
portion of one’s income.

47. 
The larger the time interval considered, or the
longer the run, the more elastic is the good’s
demand curve.
◦ There are more substitutes in the long run than in the
short run.
◦ The long run provides more options for change.

48. 
The degree to which the price elasticity of demand
is inelastic or elastic depends on:
◦ How many substitutes there are
◦ How well a substitute can replace the good or service
under consideration
◦ The importance of the product in the consumer’s total
budget
◦ The time period under consideration