Elasticity: measure responsiveness of change

Price elasticity of demand (PED) measures how the quantity demanded of a good respond to a
change in its price.

Calculate= Percentage change in quantity demanded/ Percentage change in price

Here are the main types of price demand elasticity, along with examples:

1. Perfectly Elastic Demand

 Definition: Even the slightest change in price leads to an infinite change in quantity
demanded. (PED= infinite)
 Example: A highly competitive product like commodities on a global market (e.g., wheat
or gold) where consumers can easily switch suppliers.

2. Relatively Elastic Demand

 Definition: A percentage change in price leads to a larger percentage change in quantity

demanded (∣PED∣>1)
 Example:
o Luxury goods such as designer clothes or high-end electronics.
o Goods with many substitutes like soft drinks or specific smartphone brands.

3. Unitary Elastic Demand

 Definition: A percentage change in price results in an equal percentage change in

quantity demanded (∣PED∣=1)
 Example:
o Goods where spending remains proportionate to income, such as mid-tier
restaurant dining.

4. Relatively Inelastic Demand

 Definition: A percentage change in price leads to a smaller percentage change in quantity

demanded (∣PED∣<1)
 Example:
o Necessities like gasoline, basic medications, or staple foods (e.g., bread and rice).
5. Perfectly Inelastic Demand

 Definition: Quantity demanded remains constant regardless of price changes (∣PED∣=0)

 Example:
o Life-saving drugs like insulin for diabetics.
o Essential utilities with no substitutes, like water in certain areas.

TR=P*Q
 If demand is elastic, a 1 percent price cut increases, the quantity sold by more than 1 percent, and
total revenue increases.

Suppose the price of a luxury good like designer bags decreases from $500 to $400 (20%
decrease), and the quantity demanded increases from 10 to 15 units (50% increase).

 Total Revenue before: 500×10=5000

 Total Revenue after: 400×15=6000

 If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1 percent, and
total revenues decreases.

Example: Suppose the price of a necessity like insulin increases from $50 to $60 (20%
increase), and the quantity demanded decreases from 100 to 95 units (5% decrease).

 Total Revenue before: 50×100=5000

  Total Revenue after: 60×95=5700
 Result: Total revenue increases, indicating inelastic demand.

 If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent, and total
revenue remains unchanged.

The cross elasticity of demand is a measure of the responsiveness of demand for a good to a change in
the price of a substitute or a complement, other things remaining the same.

 The formula for calculating the cross elasticity

=Percentage change in quantity demanded/ Percentage change in price of substitute or

complement

The income elasticity of demand measures how the quantity demanded of a good respond to a
change in income, other things remaining the same.

The formula for calculating the income elasticity of demand = Percentage change in quantity
demanded/Percentage change in income

If the income elasticity of demand is greater than 1, demand is income elastic and the good is a normal
good.

If the income elasticity of demand is greater than zero but less than 1, demand is income inelastic and
the good is a normal good.

If the income elasticity of demand is less than zero (negative) the good is an inferior good.

The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of
a good when all other influences on selling plans remain the same.

Elasticity of supply measures the responsiveness of the quantity supplied to a change in price. A more
elastic supply means that producers can adjust the quantity supplied more easily for a given price
change.

10 Multiple-Choice Questions (MCQs)

1. If the price elasticity of demand for a good is greater than 1, the demand is:

a) Elastic
b) Inelastic
c) Unit elastic
d) Perfectly inelastic

Answer: a) Elastic
2. Which of the following goods is likely to have the highest price elasticity of
demand?

a) Insulin
b) Airline tickets
c) Salt
d) Gasoline

Answer: b) Airline tickets

4. A negative income elasticity of demand indicates that the good is:

a) Normal
b) Inferior
c) Luxury
d) Complementary

Answer: b) Inferior

5. If a 10% increase in price leads to a 20% decrease in quantity demanded, the

price elasticity of demand is:

a) 0.5
b) 2
c) 10
d) 20

Answer: b) 2

. A Positive income elasticity of demand indicates that the good is:

a) Normal
b) Inferior
c) Luxury
d) Complementary

Answer: b) Normal
6. For a luxury good, the income elasticity of demand is likely to be:

a) Less than 1
b) Equal to 1
c) Greater than 1
d) Negative

Answer: c) Greater than 1

7. If the price elasticity of demand for a good is 0, the demand curve is:

a) Horizontal
b) Vertical
c) Downward-sloping
d) Upward-sloping

Answer: b) Vertical

8. Cross-price elasticity of demand measures:

a) The responsiveness of demand to changes in income

b) The responsiveness of demand for one good to changes in the price of another good
c) The responsiveness of supply to price changes
d) The slope of the demand curve

Answer: b) The responsiveness of demand for one good to changes in the price of another good

9. When the price elasticity of demand is unitary, an increase in price:

a) Increases total revenue

b) Decreases total revenue
c) Leaves total revenue unchanged
d) Cannot be determined without more information

Answer: c) Leaves total revenue unchanged

10. Which of the following is most likely to have an inelastic demand?

a) Sports cars
b) Bread
c) Designer handbags
d) Airline travel

Answer: b) Bread

17. Suppose a study finds that as people's incomes rise, they tend to buy fewer subway tokens
because they are more likely to have a car. This would mean that subway tokens are

a. normal goods
b. inferior goods
c. price elastic goods
d. price taker goods
e. supply elastic goods

Answer: b) Inferior goods

18. A 4% increase in the price of tomatoes leads to a 1% reduction in the quantity of tomatoes
demanded. The price elasticity of demand for tomatoes is:

a. -0.5
b. -0.6
c. -0.25
d. -1.25
e. -4.019.

Answer: c) -0.25

Which of the following goods is most likely to have high price elasticity of demand?

a. A staple food.

b. A good that forms a very small part of a person’s total budget.

c. A good for which there are many close substitutes.

d. A vital medicine.

e. None of the above

Answer: c) A good for which there are many close substitutes.

10 True or False Questions

1. A good with perfectly elastic demand has an elasticity of infinity.

Answer: True

3. Price elasticity of demand is always negative.

Answer: True

4. Income elasticity of demand for a normal good is always negative.

Answer: False

5. A perfectly inelastic demand curve is represented by a horizontal line.

Answer: False

6. Goods with close substitutes tend to have more elastic demand.

Answer: True

7. When demand is elastic, an increase in price decreases total revenue.

Answer: True

9. Inferior goods have positive income elasticity of demand.

Answer: False

10. A high price elasticity of demand means consumers are highly sensitive to price
changes.

Answer: True

Perfectly elastic demand refers to a situation in which any price change for the
good in question, no matter how small, will produce an "infinite" change in quantity
demanded.

Answer: True

When the seller increases the price charged for a good with an elastic demand, the
seller’s revenues will go up.

Answer: False

Elasticity is the same as the slope of the demand curve

Answer: False

Complete:
When you drop by the only coffee shop in your neighborhood, you notice that the price of a cup of
coffee has increased considerably since last week. You decide it’s not a big deal, since coffee isn’t a big
part of your overall budget, and you buy a cup of coffee anyway. Most of the other coffee drinkers who
frequent the coffee shop make a similar calculation. Thus, the demand for coffee in your neighborhood
is relatively _________________________

You sell muffins for one dollar each. If you raise your price by even one penny, you will lose all your
customers. The demand curve for your muffins is thus ____________________________________.

The elasticity of demand is calculated as the percent change in ___________ divided by the percent
change in _____________.

The responsiveness of demand to income is known as the ______________________ of demand.

The income elasticity of demand is _____________________ for inferior goods and

_______________________ for normal goods.

For a given price range, which of the supply curves in the graph shown above is characterized by a
relatively greater elasticity of supply?
 o SA is steeper than SB
o A steeper curve indicates that quantity supplied changes less for a given price
change, meaning supply is less elastic.
o A flatter curve (like SB) indicates that quantity supplied changes more for the
same price change, meaning supply is more elastic.

For a Given Price Range:

o On SA , a price change results in a smaller change in quantity supplied.

o On SB, the same price change results in a larger change in quantity supplied.

Thus, SB represents a supply curve with a relatively greater elasticity.