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Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Price Elasticity of Demand
The percentage changein the quantity
demanded given. . .
. . . a one percentchange in the price.
A
B
DemandP
Q
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Demand Illustrated
Perfectly Inelastic
The quantity demanded is unresponsive to changes in Price.
ED = 0
Q
P1
P2
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Demand Illustrated
Perfectly Elastic
P1
A small increasein price will causedemand to drop offcompletely.
P
Q
ED = ∞∞∞∞
Computing Elasticity Coefficient
Price Elasticity of Demand
=
Percentage Change in Quantity Demanded
Percentage Change in Price
u Computed as the Absolute Value of the percentage change in the Quantity Demanded divided by the percentage change in Price which caused it.
Computing Elasticity Coefficient
ED=
(8 - 10) / 10
($2.20 - $2.00) / $2.00
= 2D
Q
P
108
$2.20
$2.00 Relative to theEndpoint (10, 2)
=20%
10%
Computing Elasticity Coefficient
ED=
(8 - 10) / 8
($2.20 - $2.00) / $2.20= 2.77
D
Q
P
108
$2.20
$2.00
Relative to theEndpoint (8, 2.20)
Computing Elasticity Coefficient
ED=
(8 - 10) / 9
($2.20 - $2.00) / $2.10= 2.34
D
Q
P
98
$2.20
$2.10
Relative to theMidpoint (9, 2.10)
$2.00
10
Point Elasticity at theMidpoint: A = (Q, P) = (9, 2.10)
Let ssP = 2.20 - 2.00 and ssQ = 10 - 8
ED=
(8 - 10) / 9
($2.20 - $2.00) / $2.10
=ssQ / Q
ssP / P
= P / Q
ssP / ssQ
D
Q
P
8
$2.20
$2.10
$2.00
10
ssP
ssQ9
A
Point Elasticity at Point A:A Ratio of Two slopes
D
Q
P
8
$2.20
$2.10
$2.00
10
ssP
ssQ9
A= (Q,P)
O
Let P= 2.10 and Q= 9 then
ED = P / Q
ssP / ssQ
ED=Slope OASlope D
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity along A Curve
P QRevenue PxQ
ElasticitySlope of D
Slope ofRay to Origin
01234
43210
03430
11111
0 1/3 13/1=3∞∞∞∞
0 1/3 1 3∞∞∞∞
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity along A Curve
D=(3,1)
C=(2,2)
B=(1,3)
4321
4
3
2
1
0
A=(0,4)
E=(4,0)
P
Q
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity along A Curve
4321
4
3
2
1
0
ED=
P
Q
ED=1
ED=1/3
ED=0
ED=3
∞∞∞∞ElasticDemand
InelasticDemand
Unit Elastic Demand
Comparing Elasticities
Since slope D1 > slope D2 then
given point the relative size of the slopes indicates the relativesize of the elasticities.
at point A: E1 < E2 - i.e. at a
D1
A
O
P
Q
D2
Computing Income Elasticity
Income Elasticity of Demand =
Percent Change in Quantity Demanded
Percent Change in Income
u Computed as the percent change in the quantity demanded, at the given price, divided by the percent change in Income which caused the change.
Slide 5 - 47
Other Elasticities of Demand (a)
uIncome Elasticity of DemanduThe amount by which the quantity
demanded changes in response to a one-percent change in income
Income e lasticity =
∆
∆
II
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Income Elasticity... Types
YD > 0 Normal Goods
YD < 0 Inferior Goods
YD = 0 Income-neutral Goods
Slide 5 - 48
Other Elasticities of Demand (b)
uCross Price Elasticity of DemanduThe amount by which the quantity
demanded of one good changes in response to a one-percent change in the price of another good
C ro s s - price elas ticity =
∆
∆
PP
X
X
Y
Y
Slide 5 - 49
Other Elasticities of Demand (b)
uCross Price Elasticity of Demand
uIf the Cross-Price Elasticity is Positive then the commodities are Substitutes
uIf the Cross-Price Elasticity is Negative then the commodities are Complements
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Price Elasticity of Supply
The percentagechange in
quantity supplied
resulting from aone (1) percentchange in price.
Price
Quantity
A
B
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Ranges of Elasticity
� Perfectly Elastic infinite
� Relatively Elastic >1
� Unitary or Unit =1
� Relatively Inelastic <1
� Perfectly Inelastic = 0
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Supply Illustrated
Perfectly Inelastic
Perfectly Elastic
P
Q
Computing Elasticity Coefficient
Elasticityof Supply
=
Percent Change inQuantity Supplied
Percent Change in Price
=ES
Therefore,
ES = =
Q /Q P / Q
P/ QP/ P
Point Elasticity of Supply at A
P
Q
A
O
2.202.10
1098
2.00P
Q
Q
P
ES =P / Q
P/ Q
S
=Slope of S
Slope of OA
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Supply Illustrated
P
Q
All rays throughthe origin areUnitary Elasticthroughout.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Supply Illustrated
P
Q
Elasticity is always > 1i.e. elastic.
The Elasticity Decreases as we move up along acurve.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Supply Illustrated
P
Q
Elasticity is always < 1i.e. inelastic.
The Elasticity Increases as we move up along a curve.
Comparing Elasticities
Since slope S1 < slope S2 thenat point A: E1 > E2
S1
S2
A
O
P
Q
Comparing Elasticities
Since slope S1 < slope S2 thenat point A: E1 > E2
S1
S2
A
O
P
Q
Slide 5 - 47
Other Elasticities of Demand (a)
uIncome Elasticity of DemanduThe amount by which the quantity
demanded changes in response to a one-percent change in income
Income e lasticity =
∆
∆
II
Slide 5 - 48
Other Elasticities of Demand (b)
uCross Price Elasticity of DemanduThe amount by which the quantity
demanded of one good changes in response to a one-percent change in the price of another good
C ro s s - price elas ticity =
∆
∆
PP
X
X
Y
Y
Slide 5 - 49
Other Elasticities of Demand (b)
uCross Price Elasticity of Demand
uIf the Cross-Price Elasticity is Positive then the commodities are Substitutes
uIf the Cross-Price Elasticity is Negative then the commodities are Complements
