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 Price Elasticity of Demand
Elasticity and its
Implications
Other Demand Elasticities

Price Elasticity of Supply

Elasticity and its Implications

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Elasticity and its Implications > Price Elasticity of Demand

Price Elasticity of Demand

• Defining Price Elasticity of Demand
• Measuring the Price Elasticity of Demand
• Interpretations of Price Elasticity of Demand
• Determinants of Price Elasticity of Demand

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Elasticity and its Implications > Other Demand Elasticities

Other Demand Elasticities

• Cross-Price Elasticity of Demand
• Income Elasticity of Demand
• Calculating Elasticities

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Elasticity and its Implications > Price Elasticity of Supply

Price Elasticity of Supply

• Definition of Price Elasticity of Supply
• Measuring the Price Elasticity of Supply
• Applications of Elasticities

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Appendix
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Elasticity and its Implications

Key terms
• Arc elasticity The elasticity of one variable with respect to another between two given points.
• capacity The maximum that can be produced on a machine or in a facility or group.
• Complement A good with a negative cross elasticity of demand, meaning the good's demand is increased when the price of
another good is decreased.
• Cross-price elasticity of demand Measures the responsiveness of the demand for a good to a change in the price of another
good.
• demand The desire to purchase goods and services.
• demand The desire to purchase goods and services.
• elastic Demand for a good is elastic when a change in price has a relatively large effect on the quantity of the good demanded.
• elastic Sensitive to changes in price.
• inelastic Demand for a good is inelastic when a change in price has a relatively small effect on the quantity of the good
demanded.
• inelastic Not sensitive to changes in price.
• luxury Something very pleasant but not really needed in life.
• mobility The ability for economic factors to move between actors or conditions.

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Elasticity and its Implications

• Necessary Good A type of normal good. An increase in income leads to a smaller than proportional increase in the quantity
demanded.
• Own-price elasticity of demand Responsiveness of quantity demanded to a change in the good's own price
• Point elasticity The measure of the change in quantity demanded to a very small change in price.
• Price elasticity of demand The percent change in quantity demanded due to a 1% change in price.
• substitute A good with a positive cross elasticity of demand, meaning the good's demand is increased when the price of another
is increased.
• Substitute Good A good that fulfills a consumer need in a way that is similar to another good.
• Superior Good A type of normal good. Demand increases more than proportionally as income rises.
• supply The amount of some product that producers are willing and able to sell at a given price, all other factors being held
constant.
• supply The amount of some product that producers are willing and able to sell at a given price, all other factors being held
constant.
• Unit Elastic Demand for a good is unit elastic when the percentage change in quantity demanded is equal to the percentage
change in price.

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Elasticity and its Implications

Complements
Two goods that complement each other have a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls.

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Elasticity and its Implications

Income Elasticity of Demand

Income elasticity of demand measures the percentage change in quantity demanded as income changes.

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Elasticity and its Implications

Perfectly Elastic Demand

Perfectly elastic demand is represented graphically by a horizontal line. In this case the PED value is the same at every point of the demand curve.

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Elasticity and its Implications

Supply and Demand Curves

A demand curve is used to graph the impact that a change in price has on the supply and demand of a good.

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Elasticity and its Implications

Elastic Demand
For elastic demand, when there is an outward shift in supply, prices fall which causes a large increase in quantity demanded.

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Elasticity and its Implications

Substitutes
Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises.

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Elasticity and its Implications

Independent
Two goods that are independent have a zero cross elasticity of demand: as the price of good Y rises, the demand for good X stays constant.

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Elasticity and its Implications

Perfectly Inelastic Demand

When demand is perfectly inelastic, quantity demanded for a good does not change in response to a change in price.

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Elasticity and its Implications

Perfectly Elastic Demand

When the demand for a good is perfectly elastic, any increase in the price will cause the demand to drop to zero.

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Elasticity and its Implications

Perfectly Inelastic Demand

Perfectly inelastic demand is graphed as a vertical line. The PED value is the same at every point of the demand curve.

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Elasticity and its Implications

Elasticity and the Demand Curve

The price elasticity of demand for a good has different values at different points on the demand curve.

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Elasticity and its Implications

Arc Elasticity
To calculate the arc elasticity, you need to know two points on the demand curve. The calculation does not require a function for the relationship between
price and quantity demanded.

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Elasticity and its Implications

Perfectly Inelastic Supply

A graphical representation of perfectly inelastic supply.

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Elasticity and its Implications

Price elasticity over time

This graph illustrates how the supply and demand of a product are measured over time to show the price elasticity.

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Elasticity and its Implications

Inelastic Demand
For inelastic demand, when there is an outward shift in supply and prices fall, there is no substantial change in the quantity demanded.

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Elasticity and its Implications

Sale
There is an inverse relationship between price and quantity demanded, so the elasticity coefficient is almost always negative.

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5Pfi7a-5PFcqc-5PFq78-6cxSGw-6ddUxL-6oStve-6LJVUR-6RVfAw-6XRpXF-7kaW1f-7oCuDp-7oGnrU-7oGnuU-7rWenq-7xis9i-7xnfM9-8iNk5n-acsLbZ-7Jo3sW-
Elasticity and its Implications

Price Elasticity of Demand and Revenue

PED is based off of percent changes, so the starting nominal values of price and quantity are significant.

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Elasticity and its Implications

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