Elasticity

ECON1E: Principles of Microeconomics

University of St. La Salle

Elasticity
A general concept used to quantify
the response in one variable when
another variable changes.
Elasticity measures the
responsiveness of one variable to a
certain change of another variable.

Elasticity
The basic formula to determine elasticity is:
Elasticity = percentage change in variable x
percentage change in variable y

Using mathematical symbols,

= %x/%y

Types of Elasticity
Elastic
The percentage change in variable x is greater than the percentage
change in variable y. It is said to be elastic whenever the elasticity
coefficient is greater than 1 ( > 1).

Inelastic
The percentage change in variable x is less than the percentage
change in variable y. The elasticity coefficient is less than 1 ( < 1).

Types of Elasticity
Unitary Elastic
The percentage change in variable x is equal to the percentage
change in variable y. The elasticity coefficient is equal to 1 ( = 1).

Perfectly Elastic
Any change in variable y will have an infinite effect on variable x ( =
infinity).

Types of Elasticity
Perfectly Inelastic
Any change in variable y will have no effect
on variable x ( = 0).

Price Elasticity
Price elasticity measures the
percentage change in quantity with
respect to percentage change in
price. Categories of price elasticity
include price elasticity of demand
and price elasticity of supply.

Price Elasticity of Demand

Price elasticity of demand measures
the responsiveness of the quantity
demanded with respect to its price.
The basic formula used to calculate
the coefficient of price elasticity of
demand (D) is:
D = %Qd / %P

Price Elasticity of Demand

Mathematically, the point elasticity of
demand (in absolute value):
D = %Qd

Q2 Q1

or

Q 2 Q1

P1

% P

Q1

P2 P 1
P1

P 2 P1

Q1

Price Elasticity of Demand

Mathematically, the arc elasticity of
demand (in absolute value):
ARC =

Q 2 Q1
x
P2 P 1

(P1 + P2) / 2
(Q1 + Q2) / 2

Hypothetical Data of Point and Arc

Elasticity
Points

Price of Good
X (Px)

Quantity
Demanded of
Good X (Qdx)

A
B
C
D
E
F
G
H
I

4
5
9
12
15
20
26
30
39

700
475
430
400
393
344
310
300
150

Price Elasticity of Demand

Point elasticity of demand
From Points A to E

Q2 Q1
Q1

=
700

P2 P 1
P1

393 700

2.75
15 4
4

Price Elasticity of Demand

Arc elasticity of demand
From Points E to I

ARC =
/ 2

Q 2 Q1
x

(P1 + P2)

P2 P 1

(Q1 + Q2)

/ 2

= 150 393
(15+39) / 2

Price Elasticity of Demand

Classifications

Elastic Demand
A small change in
price results to
greater change in
quantity demanded.
This means that
consumers are very
sensitive to the price
of goods.

Price Elasticity of Demand

Classifications

Inelastic Demand
A percentage change
in quantity demanded
is less than the
percentage change in
price. Consumers are
not sensitive to any
change in price. Any
change in price has
little significance.

Price Elasticity of Demand

Classifications

Unitary Elastic Demand

A change in price is
equal to a change in
quantity demanded.
The change in price
exactly matches the
change in quantity
demanded.

Price Elasticity of Demand

Classifications

Perfectly Elastic Demand

Without change in
price, infinite change
occurs in quantity
demanded.

Price Elasticity of Demand

Classifications

Perfectly Inelastic Demand

Any change in price
creates no change in
quantity demanded.

Income Elasticity of
Demand

Income elasticity of demand measures

the

percentage

change

in

demand

over a percentage change in income.

The basic formula is:

Y = %Qd / %Y

Income Elasticity of
Demand

Mathematically:

Y = Q2 Q1 or
Q1
Y2 Y 1
Y1

Q2 Q 1
Y 2 Y1

Y1
x

Q1

Income Elasticity of
Demand
Type of Goods
Inferior good
Normal, luxury good

Normal, necessity
good

Income Elasticity
Coefficient
Negative elasticity (
< 0)
Positive elasticity
greater than one ( >
1)
Positive elasticity less
than one (0 1)

Qd

% Qd

%Y

Type of
Good

400

20

---

---

---

---

500

35

(3520)/20
= .75

(500400)/400
= .25

Normal,
luxury

600

43

1.15

Normal,
luxury

700

47

(4743)/43
= .09

(700600)/600
= .17

.53

Normal,
necessit
y

800

50

(5047)/47
= .06

(800700)/700
= .14

.43

Normal,
necessit
y

900

48

(4850)/50 =
-.04

(900800)/800
= 1.25

-.32

inferior

1000

47

(4748)/48 =

(1000900)/900

-.18

inferior

(600(4335)/35 = 500)/500
= .20
.23

Cross Elasticity of Demand

Cross elasticity of demand measures
the

responsiveness

of

quantity

demanded of a good to a change in the

price of another good
The basic formula is:

xy = %Qdx / %Py

Cross Elasticity of Demand

Mathematically:

xy =

Qx2 Qx1
Qx1
Py2 Py1
Py1

Cross Elasticity of Demand

Type of Goods
Complementary goods
Substitute goods

Income Elasticity
Coefficient
Negative elasticity
Positive elasticity

Unrelated goods

Zero

Cross Elasticity of Demand

Good
(x)

Before
Price Quantity

After
Price Quantity

1000

90

1000

100

900

45

950

80

Playstatio
n
(y)
Xbox

Cross Elasticity of Demand

xy =

Qx2 Qx1

= 100 90

Qx1
Py2 Py1
Py1
=

0.11

90
950 900

900
= 1.83

Cross Elasticity of Demand

Good
(y)

Before
Price Quantity

After
Price Quantity

700

1500

900

1200

25

650

25

600

Computer
(x)
CD-ROM

Cross Elasticity of Demand

xy =

Qx2 Qx1

= 600 650

Qx1
Py2 Py1
Py1
=

0.08

65
900 700
700
= 0.28