1. The Elasticity of Demand
Chapter 7

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. Sign of Price Elasticity
According to the law of demand, whenever the price rises, the quantity demanded falls. Thus the price elasticity of demand is always negative.
Because it is always negative, economists usually state the value without the sign.

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 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 is inelastic if the percentage change in quantity is less than the percentage change in price.
E < 1

10. Elastic Demand
Elastic Demand means that quantity changes by a greater percentage than the percentage change in price.

11. Inelastic Demand
Inelastic Demand means that quantity doesn't change much with a change in price.

12. Defining elasticities
When price elasticity is between zero and -1 we say demand is inelastic.
When price elasticity is between -1 and - infinity, we say demand is elastic.
When price elasticity is -1, we say demand is unit elastic.

13. 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.

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

15. 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.

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

17. 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

18. Calculating Elasticities: Price elasticity of Demand
What is the price elasticity of demand between A and B? P
Q2–Q1
½(Q2+Q1)
P2–P1
½(P2+P1) =
ED =
%ΔQ
%ΔP B
Midpoint
$26 C
$23 A =
10–14
½(10+14)
26–20
½(26+20)
$20
-.33
.26 =
1.27 D Q 10 12 14
7-18 18

19. Price Elasticity: Supply
Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in
% change in Quantity Supplied
% change in Price
ES =
This tells us exactly how quantity supplied responds to a change in price
Elasticity is independent of units
7-19 19

20. Price Elasticity: Supply
Supply is elastic if the percentage change in quantity is greater than the percentage change in price
Elastic supply is when ES > 1
Supply is inelastic if the percentage change in quantity is less than the percentage change in price
Inelastic supply is when ES < 1
7-20 20

21. Calculating Elasticities: Price elasticity of Supply
What is the price elasticity of supply between A and B? P
Q2–Q1
½(Q2+Q1)
P2–P1
½(P2+P1) = S
%ΔQ
%ΔP
ES = B
$5.00
Midpoint C
480.5
$4.75 =
485–476
½( )
5–4.50
½(5+4.50)
0.0187
0.105 =
0.18 A
$4.50 Q
476
485
7-21 21

22. 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

23. Calculating Elasticity

24. 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)

25. 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

26. 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.

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

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

29. 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.

30. Elasticity 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.

31. 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

32. Elasticity 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.

33. 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.

34. 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 = ¥).

35. 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).

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

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

38. Demand Curve Shapes and Elasticity
Perfectly Elastic Demand Curve
The demand curve is horizontal, any change in price can and will cause consumers to change their consumption.
Perfectly Inelastic Demand Curve
The demand curve is vertical, the quantity demanded is totally unresponsive to the price. Changes in price have no effect on consumer demand.
In between the two extreme shapes of demand curves are the demand curves for most products.

39. Demand Curve Shapes and Elasticity

40. 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.

41. 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

42. The Price Elasticity of Demand Along a Straight-line Demand Curve

43. Substitution and Elasticity
As a general rule, the more substitutes a good has, the more elastic is its supply and demand.

44. Substitution and Demand
The less a good is a necessity, the more elastic its demand curve.
Necessities tend to have fewer substitutes than do luxuries.

45. Substitution and Demand
Demand for goods that represent a large proportion of one's budget are more elastic than demand for goods that represent a small proportion of one's budget.

46. Substitution and Demand
Goods that cost very little relative to your total expenditures are not worth spending a lot of time figuring out if there is a good substitute.
It is worth spending a lot of time looking for substitutes for goods that take a large portion of one’s income.

47. Substitution and Demand
The larger the time interval considered, or the longer the run, the more elastic is the good’s demand curve.
There are more substitutes in the long run than in the short run.
The long run provides more options for change.

48. Determinants of the Price Elasticity of Demand
The degree to which the price elasticity of demand is inelastic or elastic depends on:
How many substitutes there are
How well a substitute can replace the good or service under consideration
The importance of the product in the consumer’s total budget
The time period under consideration