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Introduction
to Economics:
Social Issues
and Economic
Thinking
Wendy A .
Stock
CHAPTER 5
ELASTICITY
Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: ©Katja Bone/iStockphoto
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AFTER STUDYING THIS CHAPTER, YOU
SHOULD BE ABLE TO:
 Define elasticity
 Classify elasticity
values into inelastic
and elastic categories
 Use the elasticity
coefficient to assess
the price elasticity of
demand
Copyright © 2013 John Wiley & Sons, Inc.
 Assess the
relationship
between elasticity
and total revenue
 Describe the
factors that
determine the price
elasticity of
demand
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WHAT IS ELASTICIT Y?
Elasticity is a measure of responsiveness
between any two variables.
The Price Elasticity of Demand measures the
responsiveness of quantity demanded to
changes in price, all expressed in percentage
terms.
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CATEGORIES OF ELASTICIT Y
Elastic Demand: When a given percent change
in the price of a good causes a larger percent
change in the quantity demanded of the good.
Inelastic Demand: When a given percent
change in the price of a good causes a smaller
percent change in the quantity demanded of
the good.
 Unit Elastic Demand: When a given percent
change in the price of a good causes an equal
size percent change in the quantity demanded.
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CATEGORIES OF ELASTICIT Y
Perfectly Inelastic Demand: Quantity demanded
does not change in response to a price change.
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CATEGORIES OF ELASTICIT Y
Perfectly Elastic Demand: Quantity demanded changes
by an infinite amount in response to a price change.
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THE ELASTICIT Y COEFFICIENT
%∆𝑄 𝐷
Elasticity Coefficient = E =
%∆𝑃
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
=
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
TV example: price increased by 25 percent and
quantity demanded fell by 33 percent, so the
elasticity coefficient is:
E=
−33%
25%
= -1.32
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SUMMARY OF ELASTICIT Y COEFFICIENT
VALUES
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ELASTICIT Y AND TOTAL REVENUE
Total Revenue (TR) is the amount of money
earned when a supplier sells a given quantity
of a good.
TR = $50/shirt x 20 shirts/day = $100/day
TR = P * Q
If P , but Q
TR ?
Depending on Ed
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ELASTICIT Y AND TOTAL REVENUE
If demand is elastic, the percentage change in
quantity demanded is greater than the
percentage change in price.
Elastic;
Ed >1; (Ed = %ΔQ / %ΔP)
%ΔQ >%ΔP;
P↑→TR↓
P↓→ TR↑
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10
ELASTICIT Y AND TOTAL REVENUE
If demand is inelastic, the percentage change
in quantity demanded is less than the
percentage change in price.
Inelastic;
Ed < 1; (Ed = %ΔQ / %ΔP)
%ΔQ < %ΔP;
P↓→TR↓
P↑→ TR↑
Copyright © 2013 John Wiley & Sons, Inc.
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ELASTICIT Y AND TOTAL REVENUE
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DETERMINANTS OF THE PRICE ELASTICIT Y
OF DEMAND
 The Availability of Substitutes
 Luxury versus Necessity Goods
 The Length of Time Available to Adjust to a
Price Change
 The Portion of Income Spent on the Good
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DETERMINANTS OF THE PRICE ELASTICIT Y
OF DEMAND
 The Availability of Substitutes
The more substitutes available, the more
elastic is the demand for a good.
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DETERMINANTS OF THE PRICE ELASTICIT Y
OF DEMAND
Luxury versus Necessity Goods
Demand for luxuries is more elastic than
demand for necessity goods.
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DETERMINANTS OF THE PRICE ELASTICIT Y
OF DEMAND
The Length of Time Available to Adjust to a
Price Change
The longer the time passes since the price
change, the easier to make adjustment to
price change, thus the more elastic is
demand.
Copyright © 2013 John Wiley & Sons, Inc.
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DETERMINANTS OF THE PRICE ELASTICIT Y
OF DEMAND
The Portion of Income Spent on the Good
The price elasticity of demand tends to be
larger for goods that make up a larger portion
of people’s incomes.
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QUESTIONS/DISCUSSIONS
1. If the demand for milk is inelastic,
will a small reduction in the supply of
milk result in an increase or a
decrease in the total revenue earned
by milk suppliers? Why?
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KEY CONCEPTS
•
•
•
•
•
•
•
•
•
Elasticity
Price Elasticity of Demand
Elastic demand
Inelastic demand
Perfectly inelastic demand
Perfectly elastic demand
Unit elastic of demand
Elasticity coefficient
Total revenue
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