1. Chapter 7 Elasticity of Demand and Supply

2. Demand Elasticity (Price Elasticity of Demand)
Ed = (%∆Qd)/(%∆P)
= {(Qd2 - Qd1)/[(Qd1 + Qd2)/2]}/
{(P2 – P1)/[(P1 + P2)/2]}
Ed represented as positive by convention, though actually always negative
due to downward-sloping demand curve
hence always take absolute value

3. Chapter 20 Figure 20.1(a)

4. Chapter 20 Figure 20.1(b)

5. Chapter 20 Table 20.1

6. Chapter 20 Figure 20.2(a)

7. Determinants of Price Elasticity of Demand
Demand tends to be more elastic or less inelastic:
if the good is a luxury;
the longer the time period;
the greater the number of close substitutes; and
the more narrowly defined the market. 8

8. Determinants of Price Elasticity of Demand
Demand tends to be more inelastic or less elastic:
if the good is a necessity;
the shorter the adjustment time;
if there are few good substitutes; and
the more broadly defined the market. 9

9. Total Revenue and Elasticity
Chapter 20 Figure 20.2(b)
Total Revenue and Elasticity

10. Chapter 20 Table 20.2

11. Computing Demand Elasticity
Demand for
Ice Cream ED =
(8 - 10) / 9
2.20
($ $2.00) / $2.10
2.00 8 10 11

12. Computing Demand Elasticity
Demand for
Ice Cream ED =
(22%)
2.20
(9.5%)
2.00 8 10 12

13. Computing Demand Elasticity
Demand for
Ice Cream ED
2.32 =
2.20
2.00 8 10 13

14. Computing Demand Elasticity
Demand for
Ice Cream
Demand is Elastic ED
2.32 =
2.20
2.00 8 10 14

15. Chapter 20 Table 20.3

16. Supply Elasticity (Price Elasticity of Supply)
Es = (%∆Qs)/(%∆P)
= {(Qs2 - Qs1)/[(Qs1 + Qs2)/2]}/
{(P2 – P1)/[(P1 + P2)/2]}
Es always positive
due to upward-sloping demand curve
hence never take absolute value

17. Chapter 20 Figure 20.3(a)

18. Chapter 20 Figure 20.3(b)

19. Chapter 20 Figure 20.3(c)

20. Cross Elasticities (Cross-Price Elasticity of Demand)
Exy = (%∆Qdx)/(%∆Py)
= {(Qdx2 - Qdx1)/[(Qdx1 + Qdx2)/2]}/
{(Py2 – Py1)/[(Py1 + Py2)/2]}
Exy measures responsiveness of the demand for x to changes in the price of y
Positive for substitutes
Negative for complements
never take absolute value

21. Income Elasticities (Income Elasticity of Demand)
Ei = (%∆Qd)/(%∆Y)
= {(Qd2 - Qd1)/[(Qd1 + Qd2)/2]}/
{(Y2 – Y1)/[(Y1 + Y2)/2]}
Ei measures responsiveness of demand for x to changes in (average) consumer income
Positive for normal goods
Negative for inferior goods
never take absolute value

22. Chapter 20 Table 20.4