Elasticity

Definition and Useful Applications

Price Elasticity of Demand

Ratio of Percentage Change in Quantity Demanded to Percentage Change in Price

Price Elasticity of Demand = % Change in Quantity Demanded%Change in Price

=ΔQQ * P

ΔP

Types of Elasticity

Inelastic -- Percentage change in quantity demanded less than percentage change in price. Numerical value between 0 and -1

Elastic -- Percentage changes in quantity demanded exceeds the percentage change in price. Absolute value greater than 1

Unitary Elasticity- Numerical value equals 1.

Rank Elasticities

Beef Salt European vacation Steak Honda Accord Dijon mustard

Factors Affecting Elasticity of Demand

Availability of SubstitutesFraction of Income Spent on GoodAdjustment Time

Perfectly Elastic

0

1

2

3

4

5

6

7

8

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Perfectly Inelastic

0

1

2

3

4

5

6

7

8

9

10

0 2 4

Elasticity vs Slope

0

1

2

3

4

5

6

7

8

9

10

11

0 1 2 3 4 5 6 7 8 9 10 11

Quantity

Elasticity vs Slope

Slope = ΔP/ΔQ=-2 Elasticity at P=1

%DQ=(4.5-4)/4.25%DP=(1-2)/1.5%DQ/%DP=-.177

Elasticity at P=6%DQ=(2-1.5)/1.75%DP=(6-7)/6.5%DQ/%DP=-1.86

Elasticity changes along the demand curve

Unitary elasticity between P=4 and P=5

Above point of unitary elasticity, demand is elastic

Below point of unitary elasticity, demand is inelastic

Revenue and Elasticity

Q Price Elasticity Total Revenue0 10 0

0.5 9 -19.00 4.51 8 -5.67 8

1.5 7 -3.00 10.52 6 -1.86 12

2.5 5 -1.22 12.53 4 -0.82 12

3.5 3 -0.54 10.54 2 -0.33 8

4.5 1 -0.18 4.55 0 -0.05 0

Total Revenue

0

2

4

6

8

10

12

14

0 1 2 3 4 5 6

Quantity

Elasticity of Supply

Ratio of Percentage Change in Quantity Supplied to Percentage Change in Price

Ranking Supply Elasticities

Rental Housing (short run) Retail sales clerks Computer programmers Tiger Woods Compact Discs