ELASTICITY OF DEMAND AND SUPPLY

Terms to remember!
Elasticity – the responsiveness of demand/supply to a change in its determinant
Price Elasticity – the percentage change in quantity compared to a percentage change in price
Arc Elasticity – the coefficient price elasticity of demand between two points along the demand curve
Point Elasticity – the coefficient of price elasticity of demand at one point along the demand curve
Income Elasticity of Demand - percentage change in quantity of demanded compared to the percentage change in income
Cross Elasticity of Demand - percentage change in quantity of demanded of one good compared to the percentage change in
the price of a related good
Total Revenue – price multiplied by quantity
Inferior Goods – goods which are bought when income levels are low, the demand for which tends to decrease when income
increases
Normal Goods – goods for which demand tends to increase when income increases
Substitute Goods – goods used in place of each other
Complementary Goods – goods that supplement each other and are, therefore, used together
Engel Curve – a curve depicting the quantities of a good the consumer is willing to buy at all income levels, assuming ceteres
Paribus
POINT PRICE Qd Price Elasticity of Demand
A 30 120
B 35 100
C 40 80
D 45 50

POINT Px Qdx Point Elasticity Arc Elasticity

A 4 700
B 5 475
C 9 430
D 12 400
E 15 393
F 20 344
G 26 310

PRICE INCREASE PRICE DECREASE >1 <1 =1

Elastic Decrease Increase Elastic Elastic Unitary
Inelastic Increase Decrease Superior Inferior Normal

Income Elasticity Degree of Demand Elasticity Type of Good Income Elasticity of Demand
2 Elastic Normal Luxury
1.5 Elastic Normal Luxury
.75 Inelastic Normal Necessity
.50 Inelastic Normal Necessity
.30 Inelastic Inferior
.22 Inelastic Inferior

Original New
Price Quantity Price Quantity Cross Elasticity of Demand
Demand for Demand Curves Elasticity
Commodity X 50 30
Commodity Y 10 100 15 60

Price Elasticity of Supply