# Elasticity in Economics

**Topics:**Supply and demand, Price elasticity of demand, Elasticity

**Pages:**15 (1497 words)

**Published:**July 16, 2013

Quantitative Demand Analysis

Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

The Elasticity Concept

• How responsive is variable “G” to a change in variable “S”

EG , S

% ΔG = % ΔS

If EG,S > 0, then S and G are directly related. If EG,S < 0, then S and G are inversely related. If EG,S = 0, then S and G are unrelated. Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

The Elasticity Concept Using Calculus

• An alternative way to measure the elasticity of a function G = f(S) is

EG , S

dG S = dS G

If EG,S > 0, then S and G are directly related. If EG,S < 0, then S and G are inversely related. If EG,S = 0, then S and G are unrelated. Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Own Price Elasticity of Demand

EQX , PX %ΔQX = %ΔPX

d

• Negative according to the “law of demand.”

Elastic:

EQX , PX > 1

Inelastic: EQX , PX < 1 Unitary:

EQX , PX = 1

Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Perfectly Elastic & Inelastic Demand

Price Price D D

Quantity

Perfectly Elastic ( EQ X ,PX = −∞)

Quantity

Perfectly Inelastic ( EQX , PX = 0)

Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Own-Price Elasticity and Total Revenue

• Elastic

Increase (a decrease) in price leads to a decrease (an increase) in total revenue.

• Inelastic

Increase (a decrease) in price leads to an increase (a decrease) in total revenue.

• Unitary

Total revenue is maximized at the point where demand is unitary elastic. Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Elasticity, Total Revenue and Linear Demand

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Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Elasticity, Total Revenue and Linear Demand

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Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Elasticity, Total Revenue and Linear Demand

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Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

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Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

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Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

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Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Elasticity, Total Revenue and Linear Demand

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Michael R....

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