Chapter 4

THE
MEASUREMENT
ELASTICITY
 Price Elasticity of Demand
Chapt
er 3:
Page 2

 Price elasticity of demand is a measure of how

much the quantity demanded of a goods
responds to a change in the price of that goods.

 Price elasticity of demand is the percentage

change in quantity demanded given a percent
change in the price.
 Computing the Price Elasticity of Demand
Chapt
er 3:
Page 3

 The price elasticity of demand is computed as

the percentage change in the quantity
demanded divided by the percentage change in
price.

Percentage change in quantity demanded

Price elasticity of demand =
Percentage change in price
 The Midpoint Method: A Better Way to Calculate
Percentage Changes and Elasticities
Chapt
er 3:
Page 4

 The midpoint formula is preferable when

calculating the price elasticity of demand
because it gives the same answer regardless of
the direction of the change.
 Midpoint Method: A Better Way to Calculate Percentage Changes
and Elasticities

(Q2 - Q1) / [(Q2 + Q1) / 2]

Price elasticity of demand =
(P2 - P1) / [(P2 + P1) / 2]
 The Midpoint Method: A Better Way to Calculate
Percentage Changes and Elasticities
Chapt
er 3:
Page 5

• Point A: Price = $4 Quantity = 120

• Point B: Price = $6 Quantity = 80

 From Point A to Point B: Price rise = 50% and Quantity fall = 33%
 From Point B to Point A: Price fall = 33% and Quantity rise = 50%

(80 - 120) / [(80 + 120)/ 2]

Price elasticity of demand =
(6 - 4) / [(6 + 4)/ 2]

Mid point method

= 1
 A Variety of Demand Curves
Chapt
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 Inelastic Demand
 Quantity demanded does not respond strongly to price
changes.
 Price elasticity of demand is less than one.

 Elastic Demand
 Quantity demanded responds strongly to changes in
price.
 Price elasticity of demand is greater than one.
 A Variety of Demand Curves
Chapt

 Perfectly Inelastic
er 3:
Page 7

 Quantity demanded does not respond to price changes.

 Perfectly Elastic
 Quantity demanded changes infinitely with dose not to
price change .
 Unit Elastic
 Quantity demanded changes by the same percentage as
the price.
 A Variety of Demand Curves
Chapt
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Page 8

 Because the price elasticity of demand measures

how much quantity demanded responds to the
price, it is closely related to the slope of the
demand curve.
 Figure 5-1 a): Perfectly Inelastic Demand
Chapt
er 3:
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Price
Demand E=0

$5.00

$4.00
1. An increase
in price…

0 100 Quantity

2. …leaves the quantity demanded unchanged.

 Figure 5-1 b): Inelastic Demand
Chapter
3: Page
10

Price
Demand E<1

$5.00

$4.00
1. A 22%
increase in
price…

0 90 100 Quantity

2. … Leads to a 11% decrease in quantity demanded.

 Figure 5-1 c): Unit Elastic Demand
Chapter
3: Page
11

Price E=1
Demand

$5.00

$4.00
1. A 22%
increase in
price…

0 80 100 Quantity

2. … Leads to a 22% decrease in quantity demanded.

 Figure 5-1 d): Elastic Demand
Chapter
3: Page
12

Price E>1
Demand

$5.00

$4.00
1. A 22%
increase in
price…

0 50 100 Quantity

2. … Leads to a 67% decrease in quantity demanded.

Total Revenue and the Price Elasticity of Demand
Chapter
3: Page
13

 Total revenue is the amount paid by buyers and

received by sellers of a good.
 Computed as the price of the good times the
quantity sold.

TR = P x Q
 Figure 5-2: Total Revenue
Chapter
3: Page
14
Price

$4.00

P x Q = $400
(revenue)
Demand

0 100 Quantity
 Figure 5-3: How Total Revenue Changes When Prices
Changes: Inelastic Demand
Chapter
3: Page
15
Price

$3.00

P x Q = $240
(revenue)
$1.00
P x Q = $100
(revenue) Demand

0 80 100 Quantity
 Figure 5-4: How Total Revenue Changes When Prices
Changes: Elastic Demand
Chapter
3: Page
16
Price
Change in Total Revenue when Price Changes

$5.00

$4.00

Demand

Revenue = $200

Revenue = $100

0 20 50 Quantity
Elasticity and Total Revenue along a Linear Demand Curve
Chapter
3: Page
17

 With an elastic demand curve, an increase in

the price leads to a decrease in quantity
demanded that is proportionately larger. Thus,
total revenue decreases.
Table 5-1. Elasticity and Total Revenue along a Linear
Demand Curve
Chapter
3: Page
18
 Figure 5-5: A Linear Demand Curve
Chapter
3: Page
Price 19

7 Elasticity
is larger
than 1.
6

4
Inelasticity
is smaller
3 than 1.

0 2 4 14 Quantity
6 8 10 12
 Other Demand Elasticities
Chapter
3: Page
20

 Income elasticity of demand measures how

much the quantity demanded of a goods
responds to a change in consumers’ income.
 It is computed as the percentage change in the
quantity demanded divided by the percentage
change in income.

Percentage change
in quantity demanded
Income elasticity of demand =
Percentage change
in income
 Other Demand Elasticities
Chapter
3: Page
21

 Types of Goods
 Normal Goods

 Inferior Goods

 Higher income raises the quantity demanded

for normal goods but lowers the quantity
demanded for inferior goods.
 Other Demand Elasticities
Chapter
3: Page
22

 Goods consumers regard as necessities tend to

be income inelastic
 Examples include food, fuel, clothing, utilities, and
medical services.
 Goods consumers regard as luxuries tend to be
income elastic.
 Examples include sports cars, furs, and expensive foods.
 Other Demand Elasticities
 Cross-Price elasticity of demand measures how
Chapter
3: Page
23

much the quantity demanded of a goods

responds to a change in the price of another
goods.
 It is computed as the percentage change in the
quantity demanded divided by the percentage
change in the price of the second good.

Percentage change
in quantity demanded
Income elasticity of demand =
Percentage change
in the price of
good 2.
 PRICE ELASTICITY OF SUPPLY
Chapter
3: Page
24

 Price elasticity of supply is a measure of how much

the quantity supplied of a goods responds to a change
in the price of that good.

 Price elasticity of supply is the percentage change in

quantity supplied given a percent change in the price.
The Price Elasticity of Supply and Its Determinants
Chapter
3: Page
25

 Ability of sellers to change the amount of the

goods they produce.
 Beach-front land is inelastic.
 Books, cars, or manufactured goods are elastic.
 Time period.
 Supply is more elastic in the long run.
 Computing the Price Elasticity of Supply
Chapter
3: Page
26

 The price elasticity of supply is computed as the

percentage change in the quantity supplied
divided by the percentage change in price.

Percentage change
in quantity supplied
Price elasticity of supply =
Percentage change in price
 Computing the Price Elasticity of Supply
Chapter
3: Page
27
• Suppose an increase in the price of milk from $1.90 to $2.10 a litre
raises the amount that dairy farmers produce from 9000 to 11 000
L per month…

 … using the midpoint method, we calculate the percent change in the

price as (2.10 - 1.90) / 2.00 x 100 = 10%
 Similarly, we calculate the percent change in the quantity supplied as (11
000 - 9000) / 10 000 x 100 = 20%

20%
Price elasticity of supply = = 2.0
10%
 Figure 5-6 a): Perfectly Inelastic Supply
Chapter
3: Page
28

Price
Supply E=0

$5.00

$4.00
1. An increase
in price…

0 100 Quantity

2. …leaves the quantity supplied unchanged.

 Figure 5-6 b): Inelastic Supply
Chapter
3: Page
29

Price E<1
Supply

$5.00

$4.00
1. A 22%
increase in
price…

0 100 110 Quantity

2. …leads to a 10% increase in quantity

supplied.
 Figure 5-6 c): Unit Elastic Supply
Chapter
3: Page
30

Price E=1

Supply

$5.00

$4.00
1. A 22%
increase in
price…

0 100 125 Quantity

2. …leads to a 22% increase in quantity

supplied.
 Ch
Figure 5-6 d): Elastic Supply apt
er
3:
Price Pag E>1
e
31

Supply
$5.00

$4.00
1. A 22%
increase in
price…

0 100 200 Quantity

2. … leads leads to a 67% increase in quantity
supplied.
 Ch
apt
er
3:
Pag
e

The End
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