1. Principles of Microeconomics Shomu Banerjee
5. Elasticities
Emory University
Spring 2013

2. Price elasticity of demand
%∆ in quantity demanded
%∆ in price
e is always negative or zero
|e| < 1: inelastic
|e| > 1: elastic
|e| = 1: unitary elastic

3. Incidence revisited (inelastic demand)
Price
Quantity 10 4 5
Supply
Demand
Effective supply 6 2 $3
Quantity 10 4 5
Supply
Demand
Effective supply 6 2 $3
Price

4. Incidence revisited (elastic supply)
Price
Quantity 10 3 5
Supply
Demand
Effective supply 6 2 $3
Price
Quantity 10 3 5
Supply
Demand
Effective supply 6 2 $3

5. Pass-through
The more inelastic the demand
The more elastic the supply

6. Price elasticity and revenues10
Demand 7 A 6
Midpoint B C 3 4 10
Quantity

7. Price elasticity and revenues10
Demand
Midpoint 4 A 3 B C 6 7 10
Quantity

8. Price elasticity and linear demand10
Elastic range
|e| = 1
Inelastic range
Demand
|e| = 0 10
Quantity

9. Income elasticity of demand
ei =
%∆ in quantity demanded
%∆ in income
ei could be negative, zero or positive
ei < 0: inferior good
ei > 0: normal good

10. Cross-price elasticity of demand
exy =
%∆ in quantity demanded of x
%∆ in price of y
exy > 0: x and y are substitutes
exy < 0: x and y are complements
exy = 0: x and y are unrelated