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Economics 100
Lecture 8’
Elasticity II
Elasticity
 Elastic
and inelastic demand
 Elasticity, revenue, and expenditure
 Other elasticities of demand
 Elasticity of supply
Elastic and inelastic demand
 Perfectly
elastic: infinity
 Elastic: greater than one
 Unit elastic: one
 Inelastic: less than one
 Perfectly inelastic: zero (Example)
(insuline is perfectly inelastic!!!)
 We
will soon see that the convention of
labelling elastic those values of
elasticity over 1 and inelastic those
values of elasticities under 1 is not
really arbitrary: it has some operational
meaning...
Elastic and inelastic demand
Elastic and inelastic demand
Elastic and inelastic demand
 CAUTION:
Elasticity is not the same as
slope,…but they are related!
Elasticity along a linear
demand curve
 At
a high
price and
small
quantity,
elasticity is
large
Elasticity along a linear
demand curve
 At
a low
price and
large
quantity,
elasticity is
small
Elasticity along a linear
demand curve
 At
the midpoint price
and
quantity,
elasticity is
one
Factors that influence the
elasticity of demand
 Substitutes
(insulin versus pencils)
 % of income spent on good (cars versus
pencils)
 Time elapsed since price change (shortrun versus long-run reactions to water
or gasoline or energy prices)
Elasticity, Revenue, and
Expenditure
 If
demand is unit elastic, an increase in
price results in an equal percentage
decrease in the quantity demanded, so
total revenue (for the seller) and total
expenditure (for the consumer) remain
constant
Elasticity, Revenue, and
Expenditure
 If
demand is elastic => an increase in
price results in an larger percentage
decrease in the quantity demanded, so
total revenue and total expenditure
decrease.
Elasticity, Revenue, and
Expenditure
 If
demand is inelastic => an increase in
price results in an smaller percentage
decrease in the quantity demanded, so
total revenue and total expenditure
increase
 As
you can see, and as in the case of
temperature (where we use a 0 degree
Co and a 100 Co as meaningful
thresholds), elasticity values range
along a continuum, but the convention
of establishing a borderline at value one
has some operational meaning too...
More elasticities of demand
 Cross
elasticity of demand
 Income elasticity of demand
Cross elasticity of demand
 Measures
the
responsiveness
of the demand
for a good to a
change in the
price of another
good
Cross elasticity of demand
 Substitute:
cross elasticity
of demand is
positive
 Complement
cross elasticity
of demand is
negative
 Important now
not to use
absolute value!!!
Income elasticity of demand
 Measures
the
sensitivity of
demand to
changes in
income



Normal good:
positive
Inferior good:
negative
What if it is
zero???????
Income elasticity of demand


Normal good
positive (if
greater than 1,
we say income
elastic or
luxury good, if
less than 1, we
say income
inelastic)
Inferior good
negative
Income elasticity of demand
 Income
elasticity can
easily exhibit
different
values along
different
ranges of the
consumption
spectrum
Elasticity of supply
 Measures
the responsiveness of a
change in the quantity supplied of a
good to a change in its price
 Ranges from zero (vertical supply
curve) to infinity (horizontal supply
curve)
 Longer
period of adjustment, greater is
the elasticity of supply
 Less substitutes for the production
process and/or productive resources
(flower shop versus a mine)
Elasticity of supply
 MS
is zero
elastic
 SS is
inelastic
 LS is elastic
Next, Markets
in Action