Elasticity

Elasticity provides a technique for estimating the response of one variable to changes in some other
variable.

Different Types of elasticity

 Price Elasticity of Demand

 Price Elasticity of Supply

 Income Elasticity of Demand

 Cross Price Elasticity

Price elasticity of demand

Price elasticity of demand is a measure of the responsiveness of quantity demanded to changes in price.
More specifically, it addresses the “percentage change in quantity demanded for a given percentage
change in price

What does “price elasticity of demand is 2” mean?

A price elasticity of demand equal to 2 means that the percentage change in quantity demanded will
be 2 times any percentage change in price. If price changes 5 percent, quantity demanded will change
10 percent; if price changes 10 percent, quantity demanded will change 20 percent.
 Price elasticity of demand

Are elasticity and slope same thing?

 Different Forms of price elasticity of demand

Different Forms of price elasticity of demand

The percentage change in The percentage change in The percentage change in

quantity demanded is quantity demanded is less than quantity demand is equal to
greater than the percentage the percentage change in percentage change in price:
change in price: Ed >1 price: Ed < 1 Ed = 1
 Different Forms of price elasticity of demand

A small change in price reduces A change in price does not change

quantity demanded to zero: Ed = ∞ quantity demanded: Ed = 0

Price Elasticity of Demand and Total Revenue (Total Expenditure)

Total revenue (TR) of a seller equals the price of a good times the quantity of the good sold. For
example, if the hamburger stand down the street sells 100 hamburgers today at $1.50 each, its
total revenue is $150.

Suppose, the hamburger vendor raises the price of hamburgers to $2 each. What do you predict
will happen to total revenue?

 because of the higher price, the quantity of hamburgers sold falls to 50. Total revenue is now
$100 (whereas it was $150).
 Whether total revenue rises, falls, or remains constant after a price change depends on whether
the percentage change in quantity demanded is less than, greater than, or equal to the
percentage change in price.
 Thus, price elasticity of demand influences total revenue.
 Price Elasticity of Demand and Total Revenue (Total Expenditure)

If demand is elastic, the percentage change in quantity demanded is greater than the percentage
change in price. Given a price rise of, say, 5 percent, quantity demanded falls by more than 5
percent—say, 8 percent. What happens to total revenue?

Because quantity demanded falls, or sales fall off, by a greater percentage than the percentage rise in
price, total revenue decreases.

INELASTIC DEMAND AND TOTAL REVENUE

If demand is inelastic, the percentage change in quantity demanded is less than the percentage change
in price. If price rises, quantity demanded falls but by a smaller percentage than the percentage rise in
price. As a result, total revenue increases..

However, if price falls, total revenue decreases.

 Cross elasticity of demand

Cross elasticity of demand measures the responsiveness in the quantity demanded of one good to
changes in the price of another good.

Consider two goods: Skippy peanut butter and Jif peanut butter. Suppose that when the price of Jif
increases by 10 percent, the quantity demanded of Skippy increases by 45 percent.

Income Elasticity of Demand

Income elasticity of demand measures the responsiveness of quantity demanded to changes in

income. It is calculated by dividing the percentage change in quantity demanded of a good by the
percentage change in income.
Income elasticity of demand

Price elasticity of Supply

Price elasticity of Supply