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Dr. Hisham H. Abdelbaki
ECON 140
Chapter FOUR
Chapter 4
Elasticity
Two general rules:
1- Definition Rule:
2- Formula Rule:
Types of elasticity
Demand
Price elasticity
supply
Income elasticity
Cross elasticity
1-
Price elasticity of demand (PED)
i)
Definition
Price
elasticity
Responsiveness of a change in Qd to a change in the price of a product.
ii)
Formula
= percentage change in Qd / percentage change in price
=
=
Example:
Price
Qd
2
10
6
5
Please find the PED between prices 2 & 6.
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Dr. Hisham H. Abdelbaki
iii)
ECON 140
Chapter FOUR
The sign
The sign of elasticity demand formula is always negative ….. why?
The answer is because the relationship between quantity demanded and the price is
negative.
iv)
The absolute value
According to the absolute value of the elasticity demand formula, there are five types
as follows:
1- Elastic demand when the value is greater than unity (>1)
It happens when change in price leads to bigger change in the Qd (change in Qd, in
percentage, is bigger than change in price). For instance the price of a good increase
by 10% leads to decrease in Qd by 15%. In this case the absolute value will be more
than unity.
2- Inelastic demand when the value is smaller than unity
(< 1)
It happens when change in price leads to lower change in the Qd (change in Qd, in
percentage, is less than change in price). For instance, the price of a good increase by
20% leads to decrease in Qd by 15%. In this case the absolute value will be less than
unity.
3- Unitary demand when the value equals unity ( = 1)
It happens when change in price leads to same change in the Qd (change in Qd, in
percentage, equals change in price). For instance the price of a good increase by 15%
leads to decrease in Qd by 15%. In this case the absolute value = 1.
4- Perfectly inelastic when the value equals zero ( = zero)
It happens when change in price does not lead to any change in the Qd. In this case the
absolute value = zero.
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Dr. Hisham H. Abdelbaki
ECON 140
Chapter FOUR
5- Perfectly elastic when the value equals  (=)
It happens when change in price leads to massive change in the Qd. In this case the
absolute value will be very big (nearly = )
Elasticity along a straight line demand curve
Price
Quantity
demanded
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Dr. Hisham H. Abdelbaki
ECON 140
Chapter FOUR
The relationship between elasticity and revenues
Studying elasticity of demand is useful for both government and producers because
they can indicate whether or not it will be useful to increase the price of their product
according to their knowing the relationship between the elasticity demand and the
revenues from selling their product. This relation is shown in the following table:
Type of elasticity
The relationship between price and revenues
Elastic
Inverse (negative)
Inelastic
Positive
Unitary
No effect
Price
Quantity
Total
Revenue
Quantity
The factors effect on elasticity of demand
The closer the substitute for a good
more elastic
The greater the proportion of income spent on a good
more elastic
The longer the time that has elapsed since a price change
more elastic
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Dr. Hisham H. Abdelbaki
ECON 140
Chapter FOUR
Note:
Necessity goods have no close substitutes, whereas, luxury ones have many.
2-
Income elasticity of demand (IED)
i)
Definition
Responsiveness of a change in Qd to a change in the income of the consumer.
ii)
Formula
= percentage change in Qd / percentage change in income.
=
=
Example:
Income
Qd
200
10
600
15
Please find the IED between incomes 200 & 600.
iii)
The sign
You can use the sign of the elasticity equation to indicate the type of the good.
Negative sign refers to inverse relationship between the income and quantity
demanded consequently the good is inferior whilst the positive sign means the
relationship between the income and quantity demanded is positive consequently the
good will be normal good.
less than zero ( - )
inferior good
greater than zero ( + )
Normal good
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Dr. Hisham H. Abdelbaki
ECON 140
3-
Cross elasticity of demand (CED)
i)
Definition
Chapter FOUR
Responsiveness of a change in Qd to a change in the price of other product.
ii)
Formula
= percentage change in Qd in one product / percentage change in the price of the
other product.
=
=
Example:
Price of good X
Qd for good Y
2
10
6
5
Please find the CED between prices 2 & 6.
iii)
The sign
The sign can be used to know the relationship between the two goods where:
i-
if the sign is negative then the goods are complements.
ii-
If the sign is positive then the goods are substitutes.
iii-
If the sign is neither positive nor negative (zero) then the goods are
independents.
Negative ( - )
the two goods are complements
Positive ( + )
the two goods are substitutes
Zero
the two goods are independents (unrelated)
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Dr. Hisham H. Abdelbaki
ECON 140
4-
Price elasticity of supply (PES)
i)
Definition
Chapter FOUR
Responsiveness of a change in Qs to a change in the price of the product.
ii)
Formula
= percentage change in Qs / percentage change in the price
=
=
Example:
Price
Qs
3
10
9
25
Please find the PES between prices 2 & 6.
iii)
The sign
always positive ….. why?
iv)
The absolute value
According to the absolute value of the elasticity demand formula. There are five types
as follows:
1- Elastic supply when the value is greater than unity (> 1)
It happens when change in price leads to bigger change in the Qs (change in Qs, in
percentage, is bigger than change in price). For instance the price of a good
increase by 10% leads to increase in Qs by 15%. In this case the absolute value will
be bigger than unity.
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Dr. Hisham H. Abdelbaki
ECON 140
Chapter FOUR
2- Inelastic supply when the value is smaller than unity (<1)
It happens when change in price leads to lower change in the Qs (change in Qs, in
percentage, is smaller than change in price). For instance, the price of a good
increase by 20% leads to increase in Qs by 15%. In this case the absolute value will
be less than unity.
3- Unitary supply when the value equals unity ( = 1)
It happens when change in price leads to same change in the Qs (change in Qs, in
percentage, equals change in price). For instance the price of a good increase by
15% leads to increase in Qs by 15%. In this case the absolute value = 1.
4- Perfectly inelastic when the value equals zero (=zero)
It happens when change in price does not lead to any change in the Qs. In this case
the absolute value = zero.
5- Perfectly elastic when the value equals  (=)
It happens when change in price leads to massive change in the Qs. In this case the
absolute value will be very big (nearly = )
PES = 
PES = Zero
The factors effect on price elasticity of supply
1- resources substitution possibilities
2- time frame for the supply decision
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Dr. Hisham H. Abdelbaki
ECON 140
Chapter FOUR
General Exercises:
Exercise 1:
You are given the following table:
Price of
Quantity demanded
Price of
Quantity demanded
good A
for good A
good B
for good B
Income
Quantity supplied
of good B
12
10
3
15
50
10
8
15
6
10
100
20
6
20
9
5
200
30
Req.
1- Calculate PED for good A if price changes from 8 to 6? What is the type of
demand in this case? In this case, if price increases, total revenue will ……..
(complete).
2- Indicate the type of good B.
3- Indicate the relationship between good A and good B.
4- Calculate PES for good B if price changes from 6 to 3? What is the type of
supply in this case?
Exercise 2:
From the following quotations, what, if anything, can you conclude about elasticity
of demand?
A- “As the price of CD players fell, producers found their revenue dropping
precipitously.”
B- “While I like cola, it is not an essential good—if they raise the price only a
Files a can, I'll drink water inst
Best Wishes
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