UNIT 6: ELASTICITY

Understand the concept of price elasticity of demand.

UNIT 6: ELASTICITY
Elasticity is the measure of the responsiveness of a dependent variable to changes in an
independent variable

Elasticity is defined as the percentage change in a dependent variable (the one that is affected)
if the relevant independent variable (the one that causes the change) changes by one percent.

The price elasticity of demand is a measure of the sensitivity of quantity demanded to changes
in price.

 It measures the relationship as the ratio of percentage changes between quantity demanded
of a good and changes in its price.

Price Elasticity of Demand (Ep) = % change in quantity demanded

% change in price
UNIT 6: ELASTICITY
Elasticity is independent of the units used to measure price
and quantity.

Elasticity of demand is the ratio of two percentages and so

elasticity is a number with no units.

Elasticity allows us to compare the demands for different

goods. For example, we can compare the
Price elasticity of demand at different points along a linear demand curve
PRICE ELASTICITY OF DEMAND AND TOTAL REVENUE
CATEGORIES OF ELASTICITY

There are five categories of Price elasticity of demand:

 Perfectly Inelastic : EP = 0
 Inelastic : EP is between 0 and 1
 Unitary elasticity : EP = 1
 Elastic : EP is between 1 and ∞
 Perfectly elastic : EP = ∞
CATEGORIES OF ELASTICITY
CATEGORIES OF ELASTICITY
CATEGORIES OF ELASTICITY
CATEGORIES OF ELASTICITY
CATEGORIES OF ELASTICITY
DETERMINANTS OF ELASTICITY

 Number of substitutes
 Degree of complementarity
 Type of want satisfied
 Time
 Proportion of income spent
 Definition of the market
Income elasticity of demand

The income elasticity of demand (ey) measures the responsiveness of the

quantity demanded to changes in income.

percentage change in the quantity demanded

Income elasticity = ––––––––––––––––––––––––––––––-------------------------------
percentage change in consumer’s income
Income elasticity of demand

The cross elasticity of demand (ec) is the ratio between the percentage change in
the quantity demanded of a product

percentage change in the quantity demanded of product A

ec = ––––––––––––––––––––––––––––––
percentage change in the price of product B