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Elasticity
Elasticity is a measure of how susceptible the quantity demanded of a good or service is to a
price change.
η >1 Curve elastic
η=
% change in Q
% change in P
η<1 Curve inelastic
η=1 Curve unitary
Reading Graphs for Elasticity of Demand
• A vertical demand curve indicates that the good or service is perfectly inelastic – varying the
price will not affect the quantity demanded at all.
• A horizontal curve indicates the good or service is perfectly elastic – even the slightest change
in price will make the good or service undesirable.
• A flatter curve means that the good or service in question is elastic while inelastic demand is
represented by a much more upright curve.
Factors affecting demand elasticity:
• Availability of substitutes is probably the most important factor; the more substitutes the
more elastic the demand
• Amount of income available to spend on the good
• Time
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Elasticity of Supply
• Elasticity of supply works similarly to that of demand. If a change in price results in a large
change in quantity supplied then the supply appears flatter and is considered elastic. On the
other hand if a big change in price results in only a minor change in quantity supplied the
curve would be steeper and be inelasticity.
Income Elasticity of Demand
• This is the degree to which an increase in income will cause an increase in demand.
EDy =
• If EDy is greater than one, demand for the item is considered to have a high income elasticity.
If EDy is less than one, demand is considred to be income inelastic. Luxury items usually have
a higher income elasticity.
Cross-Price Elasticity
• This is a measure the responsiveness of the demand for a good to a change in price of
another good.
If η is positive, then the goods are substitutes
- one can replace the other.
% change in QD of x
ηxy =
% change in P of y
If η is negative, the goods are complements
- they “go together”