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Introduction to Elasticity

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Introduction to Elasticity
Elasticity
Dr. Sushma Shukla
Adjunct Assistant Professor
Economics
North Virginia Community College

1

Elasticity
• In economics, elasticity is the measurement of how changing one economic variable affects others. For example: i. "If I lower the price of my product, how much more will I sell?“ ii. "If I raise the price of one good, how will that affect sales of this other good?“ iii. "If we learn that a resource is becoming scarce, will people scramble to acquire it?"
2

Price Elasticity of Demand
• Measures buyers’ responsiveness to price changes • Elastic demand
- Sensitive to price changes
- Large change in quantity
• Inelastic demand
- Insensitive to price changes
- Small change in quantity
3

Price Elasticity of Demand: Formula

• Ed =

Percentage Change in Quantity
Demanded of Product X
-----------------------------------------Percentage Change in Price of Product X

4

Price Elasticity of Demand: Formula
• Use the midpoint formula
• Ensures consistent results

• E

d

Change in Quantity

Change in Price

= -------------------- ÷ -------------------Sum of Quantities/2
Sum of Price/2

5

Price Elasticity of Demand: Formula
• Use percentages
- Unit free measure
- Compare responsiveness across products
• Eliminate the minus sign
- Easier to compare elasticities

6

Interpretation of Elasticity of Demand
•
•
•
•
•
•

Ed > 1 demand is elastic
Ed = 1 demand is unit elastic
Ed < 1 demand is inelastic
Extreme cases
Perfectly inelastic
Perfectly elastic

7

Extreme Cases

8

Extreme Cases

9

Elasticity of Demand
• http://www.youtube.com/watch?v=4oj_lnj6p
XA
• http://www.youtube.com/watch?v=MNiEHvw
6TTg

10

Total Revenue Test
• Total Revenue = Price X Quantity
• Inelastic demand
- P and TR move in the same direction
• Elastic demand
- P and TR move in opposite directions

11

Total Revenue Test
•Lower price and elastic demand
• Blue gain exceeds
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