Chapter 6

Elasticity
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 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
LO1 6-2
 Price Elasticity of Demand Formula

• Formula for price elasticity of demand

percentage change in quantity
demanded of product X
Ed =
percentage change in price
of product X

LO1 6-3
 Price Elasticity of Demand Formula

• Use the midpoint formula

• Ensures consistent results

Change in quantity Change in price

Ed = ÷
Sum of quantities/2 Sum of prices/2

LO1 6-4
 Total Revenue Test

• Total Revenue = Price X Quantity

• Total Revenue Test
• Inelastic demand
• P and TR move in the same direction
• Elastic demand
• P and TR move in opposite directions

LO2 6-5
 Determinants of Price Elasticity of
Demand

• Substitutability
• More substitutes, demand is more elastic
• Proportion of income
• Higher proportion of income, demand is
more elastic

LO3 6-6
 Determinants of Price Elasticity of
Demand

• Luxuries versus necessities

• Luxury goods, demand is more elastic
• Time
• More time available, demand is more elastic

LO3 6-7
 Price Elasticity of Supply

• Measures sellers’ responsiveness to price

changes
• Elastic supply, producers are responsive to
price changes
• Inelastic supply, producers are not as
responsive to price changes

LO4 6-8
 Price Elasticity of Supply

• Formula for price elasticity of supply

percentage change in quantity

supplied of Product X
Es =
percentage change in price
of product X

LO4 6-9
 Price Elasticity of Supply

• Es > 1 supply is elastic

• Es = 1 supply is unit elastic
• Es < 1 supply is inelastic
• Additionally,
• Es = 0 supply is perfectly inelastic

LO4 6-10
 Price Elasticity of Supply

• Time is primary determinant of elasticity of

supply
• Time periods considered
• Immediate market period
• Short run
• Long run

LO4 6-11
 Es: The Immediate Market Period

• Perfectly inelastic supply

P
Sm

Pm

P0
D2
D1
Q0 Q
LO4 6-12
 The Short Run

• Short run supply is more elastic than in the

immediate market period
P
Ss

Ps

P0
D2
D1
LO4 Q 0 Qs Q 6-13
 The Long Run

• Long run supply is even more elastic than in

the short run
P

SL

Pl

P0
D2
D1
Q0 Ql Q
LO4 6-14
 Cross Elasticity of Demand

• Formula for cross elasticity of demand

percentage change in quantity

demanded of product X
Ex,y =
percentage change in price
of product Y

LO5 6-15
 Cross Elasticity of Demand

• Measures responsiveness of purchases of one

good to change in the price of another good
• Substitute goods if elasticity is positive
• Complement goods if elasticity is negative
• Independent goods if elasticity is 0

LO5 6-16
 Income Elasticity of Demand

• Formula for income elasticity of demand

percentage change in quantity demanded

Ei =
percentage change in income

LO5 6-17
 Income Elasticity of Demand

• Measures responsiveness of buyers to

changes in their income
• Normal goods if elasticity is positive
• Inferior goods if elasticity is negative

LO5 6-18
 Income Elasticity Insights

• High income elasticities

• Most affected by a recession
• Low or negative income elasticity
• Not affected that much by a recession

LO5 6-19