Man Eco

ELASTICITY
ELASTICITY
• A general concept that can be used to quantify the response in one

variable when another variable changes
• In economics, simple logic often tells us how a change in one
variable, such as the price of a good or an interest rate is likely to
affect the behavior.
• Understanding the responsive of consumers and producers in
market to price changes is the key to answering a wide range of
economic problems.
• The importance of actual measurement cannot be overstated. Much
research being done in economics today involves the collection and
analysis of quantitative data that measure behavior. The ability to
analyze large amounts of data increased enormously with the
advent of modern computers.
Price Elasticity of Demand
You have seen the already the law of demand at
work, Recall that ceteris paribus, when prices rise,
quantity demanded can be expected to decline. When
prices fall, the quantity demanded can be expected to
rise. The normal negative relationship between price and
quantity demanded is reflected in the downward slope of
demand curves.
% change in quantity demanded

Price elasticity of demand =
% change in price
Slope and Elasticity
• The slope of a demand curve may in a rough way reveal
the responsive of the quantity demanded price changes,
but slope can be quite misleading. In fact, it is not a good
formal measure of responsiveness.
Types of Elasticity
• Perfectly Inelastic – in which quantity
demanded is not responsive at all to a change in
price
• Perfectly Elastic – in which quantity demanded
is very responsive to a change in price.
• Elastic- A demand relationship in which the percentage
change in quantity demanded is larger than the
percentage change in price in absolute value (demand
elasticity with an absolute value greater than 1)
• Inelastic – A demand relationship that responds
somewhat, but not a great deal, to changes in price.
Inelastic demand always has a numerical value between
zero and -1.
• Unitary- A demand relationship in which the percentage
change in quantity of a product demanded is the same as
the percentage change in price in absolute value (a
demand elasticity of 1)
CALCULATING ELASTICITIES
Let us say that the steak demand increases from 5 pounds (Q1) to 10
pounds (Q2) when the price drops from 3 pesos (P1) to 2 pesos (P2)
pound.
Change in Qd = Q2 – Q1 or 5 pounds

To compute for % change in Qd = Change in Qd/Q2 x 100%
= Q2 – Q1/Q2 x 100%
Q2 = 10
Q1 = 5
% change in Qd = 10 – 5/5 x 100%
= 5/5 x 100% = 100% perfect increase

To compute for % change in P = Change in price/P1 x
100%
= P2 – P1/P1 x100%
P2 = 2
P1 = 3
% change in P = 2 – 3/3 x 100%
= -1/3 x 100% = -33.3% decline
Price elasticity of demand = %ΔQd/%ΔP
= +100/-33.3
= -3.0 Demand is elastic
Calculating Price Elasticity with
the Midpoint Formula
More PRECISE way of calculating
percentages using the value HALFWAY
between P1 and P2 for the BASE in calculating
the PERCENTAGE CHANGE IN PRICE and the
HALFWAY between Q1 and Q2 as the BASE for
calculating the CHANGE PERCENTAGE IN
QUANTITY DEMANDED
Percentage Change in Quantity demanded
(%ΔQd)
To compute for % change in Qd = Change in Qd/Q1 +
Q2/2 x 100%
= Q2 – Q1/Q1 + Q2/2 x 100%
Q2 = 10
Q1 = 5
% change in Qd = 10 – 5/ (5 + 10)/2 x 100%
= 5/7.5 x 100% = 66.7%
To compute for % change in Qd = Change in P/P1 + P2/2 x
100%
= P2 – P1/P1 + P2/2 x 100%
P1 = 3
P2 = 2
% change in Qd = 2 – 3/ (3 + 2)/2 x 100%
= -1/2.5 x 100% = 40.0%
Price elasticity of demand = %ΔQd/%ΔP
= 66.7/40.0
= -1.67 Demand is elastic
•
Elasticity changes along a Straight-Line
Demand Curve
Elasticity changes from point to point along

a demand curve even when the slope of
that demand curve does not change-that is
even along a straight-line demand curve.
Demand Schedule
Price(per kg) Quantity Demanded
100 200
90 300
80 400
70 500
60 600
50 700
Percent change in quantity demanded
= Q2-Q1/ (Q1+Q2)/2 × 100
Percentage change in price

= P2-P1/(P1+P2)/2 × 100
Elasticity of Demand
= percentage change in quantity demanded/percentage change
in price
Elasticity and Total Revenue
Features of elasticity
Knowing the value of price elasticity allows us to quickly see what happens to a firm's revenue as it raises
and cuts its prices.
When demand is inelastic, raising prices will raise revenues; when demand is elastic, price increases,
reduce revenues.
TOTAL REVENUE
= Price × quantity
Effect of price changes on quantity demanded

⬆️P ⬇️QD
⬇️P ⬆️QD
Effect of price increase on a product with inelastic demand

⬆️P × ⬇️QD = TR⬆️
Effect of price increase on a product with elastic demand

⬆️P × ⬇️QD = TR⬇️
Effect of price cut on a product with elastic demand

⬇️P × ⬆️QD = TR⬇️
THE DETERMINANTS OF
DEMAND ELASTICITY
No two people have exactly the same preferences, reactions to price changes will be
different for different people, which makes generalizations risky.
[ ] Availability of Substitutes
The more possible substitutes there are for a given good or service, the greater the
elasticity.
When several close substitutes are available, customers can easily switch from one
good to another even if there is only a small change in price.
Conversely, if no substitutes are available, demand for a good is more likely to be
inelastic.
[ ] The importance of being unimportant

When an item represents a relatively small part of our total budget, we tend to pay
little attention to its price.
We are not likely to respond very much to changes in price and demand is likely to be
inelastic.

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ELASTICITY

• A general concept that can be used to quantify the response in one

% change in quantity demanded

Elasticity changes from point to point along

Percentage change in price

Effect of price changes on quantity demanded

Effect of price increase on a product with inelastic demand

Effect of price increase on a product with elastic demand

Effect of price cut on a product with elastic demand

[ ] The importance of being unimportant

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