1. What is it and how to calculate it?
Elasticity
What is it and how to calculate it?

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

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

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

6. Price Elasticity
The price elasticity of supply is the proportional change in quantity demanded relative to the proportional change in price.

7. What Information Price Elasticity Provides
Price elasticity of demand and supply gives the exact quantity response to a change in price.

8. Classifying Demand and Supply as Elastic or Inelastic
Demand or supply is elastic if the percentage change in quantity is greater than the percentage change in price.
E > 1

9. Classifying Demand and Supply as Elastic or Inelastic
Demand or supply is inelastic if the percentage change in quantity is less than the percentage change in price.
E < 1

10. Elastic Demand and Supply
Elastic supply means that quantity changes by a greater percentage than the percentage change in price.
The same holds true for demand.

11. Inelastic Demand and Supply
Inelastic supply means that quantity doesn't change much with a change in price.
The same holds true for demand.

12. Elasticity Is Independent of Units
Percentages allow us to have a measure of responsiveness that is independent of units.
This makes comparisons of responsiveness of different goods easier.

13. Calculating Elasticities
To determine elasticity divide the percentage change in quantity by the percentage change in price.

14. The End-Point Problem
The end-point problem – the percentage change differs depending on whether you view the change as a rise or a decline in price.

15. The End-Point Problem
Economists use the average of the end points to calculate the percentage change.

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

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

18. Calculating Elasticity

19. Calculating Elasticity of Demand Between Two Points
Elasticity of demand between A and B:
$26 B 24 22
midpoint C
Price 20 A 18 16
Demand 14 10 12 14
Quantity of software (in hundred thousands)

20. Calculating Elasticity of Supply Between Two Points
$6.00
5.50
Elasticity of supply between A and B:
5.00 B
4.50 C
Wage per hour A
4.00
3.50
3.00
470
480
490
Quantity of workers

21. Calculating Elasticity at a Point
Let us now turn to a method of calculating the elasticity at a specific point, rather than over a range or an arc.

22. Calculating Elasticity at a Point
To calculate elasticity at a point, determine a range around that point and calculate the arc elasticity.

23. Calculating Elasticity at a Point
Price
Quantity
$10 9 8 7 6 5 4 3 2 1 C B A 24 40 28 20

24. Calculating Elasticity at a Point
Price
Quantity
$10 9 8 7 6 5 4 3 2 1 C B A 24 40 28 20
To calculate elasticity at a point determine a range around that point and calculate the arc elasticity.

25. Elasticity and Supply and Demand Curves
Two important points to consider:
Elasticity is related (but is not the same as) slope.
Elasticity changes along straight-line demand and supply curves.

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

27. Elasticity and Supply and Demand Curves
Two important points to consider:
Elasticity is related (but is not the same as) slope.
Elasticity changes along straight-line demand and supply curves.

28. Elasticity Is Not the Same as Slope
The steeper the curve at a given point, the less elastic is supply or demand.
There are two limiting examples of this.

29. Elasticity Is Not the Same as Slope
When the curves are flat, we call the curves perfectly elastic.
The quantity changes enormously in response to a proportional change in price (E = ¥).

30. Elasticity Is Not the Same as Slope
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).

31. Perfectly Inelastic Demand Curve
Price
Quantity
Perfectly inelastic demand curve

32. Perfectly Elastic Demand Curve
Price
Quantity
Perfectly elastic demand curve

33. Elasticity Changes Along Straight-Line Curves
Elasticity is not the same as slope.
Elasticity changes along straight line supply and demand curves–slope does not.

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

35. Elasticity Along a Supply Curve
If the supply curve intersects the vertical axis, Es declines as you go up the supply curve. S1
$10
Es declines 9 8 7 6
Es = 
Price 5
Es rises 4
If the supply curve intersects the quantity axis, Es increases as you go up the supply curve. 3 2
Es = 0 1 1 2 3 4 5 6 7
Quantity