1. Elasticity 1. A definition & determinants of elasticity
Price elasticity
2. Elasticity & consumer expenditure
3. Measurement of elasticity
Arc method
Point method
4. Other measures of elasticity

2. 1. Definitions and determinants
If price rises, demand will fall
By how much?
Responsiveness of demand – elasticity
Definitions
‘the responsiveness of demand and supply to changes in price’
Price elasticity of demand (PÎd):
‘The responsiveness of quantity demanded to a change in price’ 8

3. Market supply and demand
Price a P1 D O Q2 Q1
fig
Quantity

4. Determinants of PÎd Why does the price elasticity vary?
1. number and closeness of substitute goods
The larger the number of substitute goods (that satisfy the same need), the greater (PÎd) will be
E.g. holidays v. electricity
2. the proportion of income spent on the good
If this is high, a price rise will force a substantial reduction in demand
3. Time
Time to adjust spending patterns
Short run – inelastic
Long run - elastic 8

5. 2. Elasticity and consumer expenditure
Total expenditure (TE)
= P x Q
= Total Revenue (TR)
See figure

6. Total expenditure Consumers’ total expenditure = firms’ total revenue
£2 x 3m = £6m D
Q (millions of units per period of time)

7. Elasticity & consumer expenditure
What happens to TE (and TR) as price changes?
A) elastic demand
P, Q proportionately more (TE)
P , Q  proportionately more (TE )

8. Elastic demand between two points4 D 20
Q (millions of units per period of time)

9. Elasticity & consumer expenditure
B) inelastic demand
P, Q proportionately less (TE )
P , Q  proportionately less (TE )

10. Inelastic demand between two points4 D 20
Q (millions of units per period of time)

11. Totally inelastic demand (PÎD = 0)b P1 a O Q1 Q

12. Infinitely elastic demand (PÎD = ¥)b P1 D O Q1 Q2 Q

13. Unit elastic demand (PÎD = -1)20 b 8 D O 40
100 Q

14. 3. Measurement of elasticity
Elasticity varies along the demand ( & supply) curve
Price-elastic (>1)
price-inelastic(0-1)
unitary (=1)
(1) arc method (between two points on D)
price elasticity of demand: Q/Q ÷ P/P
using the average or 'mid-point' method
Q/average Q ÷ P/average P

15. Measuring elasticity using the arc method
DQ DP
Ped =
mid Q mid P m n
P (£)
Demand
Q (000s)

16. Measurement of elasticity
(2) The Point Method
Price elasticity of demand
dQ / dP x P / Q
‘d’ – infinitesimally small change (see calculus)
dQ / dP – rate of change of quantity demanded with respect to price

17. Measuring elasticity at a point50
Ped = (1 / slope) x P/Q r 30 P D 40
100 Q

18. 4. Other measures of elasticity
Income elasticity of demand
‘…the responsiveness of demand to a change in consumer income, Y.’
Luxuries (>1), necessities (0-1),inferior goods(<0)
Cross-price elasticity of demand
‘…responsiveness of demand for one product to a change in the price of another product.’
Substitutes or complements
Price elasticity of supply
Definition & determinants? 11