# Chapter 6-1

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```					The Elasticity of Demand

Chapter 7
The Concept of Elasticity
• Elasticity is a measure of the
responsiveness of one variable to another.
• The greater the elasticity, the greater the
responsiveness.
Laugher Curve
Q. What’s the difference between an
economist and a befuddled old man with
Alzheimer’s?
A. The economist is the one with a
calculator.
The Concept of Elasticity
• Elasticity is a measure of the
responsiveness of one variable to another.
• The greater the elasticity, the greater the
responsiveness.
Price Elasticity
• The price elasticity of demand is the
percentage change in quantity demanded
divided by the percentage change in price.

Percentage change in quantity demanded
ED =
Percentage change in price
Sign of Price Elasticity
• According to the law of demand, whenever
the price rises, the quantity demanded
falls. Thus the price elasticity of
demand is always negative.

• Because it is always negative, economists
usually state the value without the sign.
What Information Price
Elasticity Provides
• Price elasticity of demand and supply
gives the exact quantity response to a
change in price.
Classifying Demand and Supply
as Elastic or Inelastic
• Demand is elastic if the percentage
change in quantity is greater than the
percentage change in price.

E>1
Classifying Demand and Supply
as Elastic or Inelastic
• Demand is inelastic if the percentage
change in quantity is less than the
percentage change in price.

E<1
Elastic Demand
• Elastic Demand means that quantity
changes by a greater percentage than the
percentage change in price.
Inelastic Demand
• Inelastic Demand means that quantity
doesn't change much with a change in
price.
Defining elasticities
• When price elasticity is between zero and
-1 we say demand is inelastic.
• When price elasticity is between -1 and
- infinity, we say demand is elastic.
• When price elasticity is -1, we say demand
is unit elastic.
Elasticity Is Independent of
Units
• Percentages allow us to have a measure
of responsiveness that is independent of
units.
• This makes comparisons of
responsiveness of different goods easier.
Calculating Elasticities
• To determine elasticity divide the
percentage change in quantity by the
percentage change in price.
The End-Point Problem
• The end-point problem – the percentage
change differs depending on whether you
view the change as a rise or a decline in
price.
The End-Point Problem
• Economists use the average of the end
points to calculate the percentage change.

(Q2 - Q1)
½Q2  Q1 
Elasticity = (P   2   - P1)
½P1 + P2 
Graphs of Elasticities
B
\$26
24                   C (midpoint)
22                          A
20
18
D
16
14                              Elasticity of demand
between A and B = 1.27
0            10    12      14
Quantity of software (in hundred thousands)
Calculating Elasticities: Price
elasticity of Demand

P        What is the price elasticity of
demand between A and B?
Q2–Q1
%ΔQ   ½(Q2+Q1)
B
ED = %ΔP =    P2–P1
\$26                 Midpoint
C                             ½(P2+P1)
\$23
\$20                A                 10–14
½(10+14) -.33
= 26–20 = .26 = 1.27
D    ½(26+20)
Q
10 12 14
7-18
Price Elasticity: Supply
• Price elasticity of supply is the
percentage change in quantity supplied
divided by the percentage change in
ES =     % change in Quantity Supplied
% change in Price
• This tells us exactly how quantity supplied responds to
a change in price
• Elasticity is independent of units

7-19
Price Elasticity: Supply
• Supply is elastic if the percentage
change in quantity is greater than the
Elastic change in ES >
percentagesupply is whenprice1

• Supply is inelastic if the percentage change in quantity
is less than the percentage change in price

Inelastic supply is when ES < 1

7-20
Calculating Elasticities: Price
Supply
elasticity ofelasticity of
What is the price
P                  supply between A and B?

Q2–Q1
S
%ΔQ ½(Q2+Q1)
B
ES = %ΔP = P2–P1
\$5.00
Midpoint                                    ½(P2+P1)
\$4.75               C                   485–476
½(485+476) 0.0187 0.18
A                         = 5–4.50 = 0.105 =
\$4.50
½(5+4.50)
Q
476    480.5    485

7-21
Graphs of Elasticities

\$6.00
5.50
5.00                                       B
4.50                                     C (midpoint)
A
4.00
3.50    Elasticity of supply
3.00    between A and B = 0.18

0
470 480 490
Quantity of workers
Calculating Elasticity

Q 2  Q1
%Q 2 (Q 1  Q 2 )
1
E      
% P      P2  P1
2 (P1  P2 )
1
Calculating Elasticity of Demand
Between Two Points
Elasticity of demand       %Q
E
\$26                  between A and B:           %P
B
24                                       10  14      4
2 (14  10 )         .33
1
22     midpoint      C            ED                12         1.27
20                                       26  20       6    .26
2 (26  20 )
A         1
23
18
16                                Demand
14

0
10      12       14
Quantity of software (in hundred thousands)
Calculating Elasticity of Supply
Between Two Points
\$6.00
5.50                               Elasticity of supply
5.00                         B     between A and B: E  %Q
4.50
A
C                                    %P
4.00                                    485  475        10
3.50                                  2 ( 485  475 )
1
.021
ES                   480        .2
3.00                                      5  4.50      .50   .105
2 (5  4.50 )
1
4.75

0
470 480 490
Quantity of workers
Calculating Elasticity at a Point
• Let us now turn to a method of calculating
the elasticity at a specific point, rather than
over a range or an arc.
Calculating Elasticity at a Point
• To calculate elasticity at a point, determine
a range around that point and calculate
the arc elasticity.
Calculating Elasticity at a Point

\$10                   (28 - 20)
9                              ½28  20 
8      E at A   =
(5 - 3)
 0.66
½5 + 3 
7
6                   C
5
A
4
B
3
2
1
20 24 28            40   Quantity
Calculating Elasticity at a Point

To calculate elasticity at a point determine
\$10      a range around that point and calculate
9      the arc elasticity.
8
7                                     28  20       8
2 (28  20 )
6                                   1
C       E at A                  24  .33  .66
5
A                  53         2    .5
4
2 (5  3)
B            1
4
3
2
1
20 24 28             40
Quantity
Elasticity and Demand Curves
• Two important points to consider:
– Elasticity is related (but is not the same as)
slope.
– Elasticity changes along straight-line demand
and supply curves.
Calculating Elasticity at a Point

\$10   Demand
9                                      Supply
8                EA = 2.33
A
7
6
D
5                                   ED = 0.86
4
3                  C E = 0.75         EB = 0.11
2                     C
B
1
6   12 18 24 30 36 42 48 54 60 Quantity
Elasticity and Demand Curves
• Two important points to consider:
– Elasticity is related (but is not the same as)
slope.
– Elasticity changes along straight-line demand
and supply curves.
Elasticity Is Not the Same as
Slope
• The steeper the curve at a given point, the
less elastic is supply or demand.
• There are two limiting examples of this.
Elasticity Is Not the Same as
Slope
• When the curves are flat, we call the
curves perfectly elastic.

• The quantity changes enormously in
response to a proportional change in price
(E = ).
Elasticity Is Not the Same as
Slope
• When the curves are vertical, we call the
curves perfectly inelastic.

• The quantity does not change at all in
response to an enormous proportional
change in price (E = 0).
Perfectly Inelastic Demand
Curve

Perfectly inelastic
demand curve

0
Quantity
Perfectly Elastic Demand Curve

Perfectly elastic
demand curve

0
Quantity
Demand Curve
Shapes and Elasticity
• Perfectly Elastic Demand Curve
– The demand curve is horizontal, any change in price can and
will cause consumers to change their consumption.

• Perfectly Inelastic Demand Curve
– The demand curve is vertical, the quantity demanded is totally
unresponsive to the price. Changes in price have no effect on
consumer demand.

• In between the two extreme shapes of demand curves
are the demand curves for most products.
Demand Curve
Shapes and Elasticity
Elasticity Changes Along
Straight-Line Curves
• Elasticity is not the same as slope.
• Elasticity changes along straight line
supply and demand curves–slope does
not.
Elasticity Along a Demand Curve
Ed = ∞
Elasticity declines along
\$10                            demand curve as we move
9                              toward the quantity axis
8               Ed > 1
7
6
Price

Ed = 1
5
4
3                                         Ed < 1
2
1                                                  Ed = 0
0    1   2   3   4    5     6      7   8   9 10 Quantity
The Price Elasticity of Demand Along a
Straight-line Demand Curve
Substitution and Elasticity
• As a general rule, the more substitutes a
good has, the more elastic is its supply
and demand.
Substitution and Demand
• The less a good is a necessity, the more
elastic its demand curve.

• Necessities tend to have fewer substitutes
than do luxuries.
Substitution and Demand
• Demand for goods that represent a large
proportion of one's budget are more elastic
than demand for goods that represent a
small proportion of one's budget.
Substitution and Demand
• Goods that cost very little relative to your
total expenditures are not worth spending
a lot of time figuring out if there is a good
substitute.

• It is worth spending a lot of time looking for
substitutes for goods that take a large
portion of one’s income.
Substitution and Demand
• The larger the time interval considered, or
the longer the run, the more elastic is the
good’s demand curve.
– There are more substitutes in the long run
than in the short run.
– The long run provides more options for
change.
Determinants of the
Price Elasticity of Demand
• The degree to which the price elasticity of
demand is inelastic or elastic depends on:
– How many substitutes there are
– How well a substitute can replace the good or
service under consideration
– The importance of the product in the
consumer’s total budget
– The time period under consideration

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