Elasticity of Demand
and Supply
Elasticy
Is the responsiveness of the
quantity of the change in
another variable.
Elasticity
❑ PRICE ELASTICITY OF DEMAND: the responsiveness
of quantity demanded to a change in price.
❑ PRICE ELASTICITY OF SUPPLY: the responsiveness
of quantity supplied to a change in price.
❑ INCOME ELASTICITY OF DEMAND: the
responsiveness of quantity demanded to a change
income.
❑ Cross Price Elasticity of Demand: the responsiveness
of quantity demanded of one good to a change in the
price of another good.
TheMathematical
Representation of Elasticity
Because the demand curve is downward sloping
and the supply curve is upward sloping the
elasticity of demand is negative and the
elasticity of supply is positive. Often these signs
are implicit and ignore.
Elasticity Labels
❑ Elastic: the condition of demand when the
percentage change in quantity is larger than
the percentage change in price.
❑ Inelastic: the condition of demand when the
percentage change in quantity is smaller than
the percentage change in price.
❑ Unitary Elastic: the condition of demand when
the percentage change in quantity is equal to
the percentage change in price.
The relationship
between Slope and Elasticity
❑ Elasticity and the slope of the demand curve are
not the same but they are related.
❑ At given price level, elasticity is greater with a
flatter demand curve.
❑ With a linear demand curve(meaning a demand
curve that has a single value for the slope)
elasticity is greater at higher prices.
Elasticity
❑ A good for which there are no good substitutes is likely to
be one for which you must pay whatever price is charged.
It is also likely to be one for which a lower price will not
induce substantially greater consumption. Thus, as price
changes there is very little change in consumption , i.e
demand is inelastic and the demand curve is steep.
❑ Inexpensive good that take up little of your income can
change in price and your consumption will not change
dramatically. Thus, at low prices, demand is inelastic.
Seeing Elasticity Through Total Expenditures
❑ Total Expenditure Rule : If the price and
the amount you spend both go in the same
direction then demand is inelastic while if
they go in opposite directions demand is
elastic.
Determinants of Elasticity
❑ Number of and Closeness of
Substitutes : The more
alternatives you have the less
likely you are to pay high prices
for a good and the more likely
you are to settle for something
that will do.
Determinants of Elasticity
❑ Time : The longer you have to
come up with alternatives to
paying high prices the more likely
it is you will shift to those
alternatives.
Extremes of Elasticity
❑ Perfectly Inelastic : the condition
of demand when prices changes
have no effect on quantity
Extremes of Elasticity
❑ Perfect Elastic: the condition of
demand when price cannot change.
ElasticityandtheDemand Curve
HowtheElasticityof DemandAffects
Reactions to Price Changes
Consumer and Producer Surplus
❑ Consumer Surplus : the value you get that
is excess of what you pay to get it
❖ On a graph , consumer surplus is the area
below the demand curve and above the
price line.
❑ Produces Surplus: the money the firm gets
that is excess of its marginal costs
❖ On a graph, producer surplus is the area
below the price line and above the supply
curve.
Quiz Time!
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