DEMAND AND SUPPLY ELASTICITY
I. Price Elasticity of Demand
A. Concept of Price Elasticity
The responsiveness or sensitivity of quantity
demanded to a change in price.
B. General Formula for Price Elasticity
Percentage change in quantity demanded
Percentage change in price
C. Mid-Points Formula
D. Interpreting the Elasticity Coefficient
A coefficient higher than 1 is elastic
" " lower " 1 is inelastic
" " exactly 1 is unitary
A negative coefficient implies that a lower
price results is lower quantities sold.
E. Extreme Elasticities
Perfectly Elastic Perfectly Inelastic
Demand or Supply Demand or Supply
II. Total Revenue Test
If Demand is Elastic If Demand is Inelastic
P TR P TR
P TR P TR
III. What Determines Price Elasticity
A. The number and quality of substitute goods.
B. The proportion of income the purchase makes up.
C. The size of the expenditure.
D. The time available for adjustments.
E. Luxuries tend to be elastic.
F. Necessities tend to be inelastic.
G. Durable goods tend to be elastic. H. Promotion.
IV. Cross Elasticity of Demand
Shows whether two goods are substitutes or
Cross Elasticity Percentage Change in Q
Formula Percentage Change in P
If two goods are substitutes, the coefficient will be
If two goods are complements, the coefficient will be
V. Income Elasticity of Demand
Shows the responsiveness of certain goods to changes
in real consumer income.
Income Elasticity % Change in Q Demanded
Formula % Change in Real Income
Income-sensitive products have a coefficient higher
The coefficient will vary according to income level.
VI. Elasticity of Supply
Shows the responsiveness of quantity supplied to a
change in price.
General Percentage Change in Q Supplied
Formula Percentage Change in Price
Determinants of Supply Elasticity