Chapter

5
Elasticity

Prepared by:

Fernando & Yvonn Quijano

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 Elasticity
5
Chapter Outline

Price Elasticity of Demand

Slope and Elasticity
Types of Elasticity
CHAPTER 5: Elasticity

Calculating Elasticities
Calculating Percentage Changes
Elasticity Is a Ratio of Percentages
The Midpoint Formula
Elasticity Changes along a Straight-Line
Demand Curve
Elasticity and Total Revenue
The Determinants of Demand Elasticity
Availability of Substitutes
The Importance of Being Unimportant
The Time Dimension
Other Important Elasticities
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Elasticity of Supply
Looking Ahead
Appendix: Point Elasticity

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 ELASTICITY

elasticity Konsep umum yang digunakan

untuk merespon perubahan kuantitas atas
suatu variabel ketika variabel lain berubah
CHAPTER 5: Elasticity

% A
elasticity of A with respect to B 
% B

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 PRICE ELASTICITY OF DEMAND

SLOPE AND ELASTICITY

CHAPTER 5: Elasticity

FIGURE 5.1 Slope Is Not a Useful Measure of Responsiveness

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 PRICE ELASTICITY OF DEMAND

price elasticity of demand Rasio

persentase perubahan kuantitas diminta
terhadap persentase perubahan harga;
mengukur tingkat responsif kuantitas yang
diminta terhadap perubahan harga
CHAPTER 5: Elasticity

% change in quantity demanded

price elasticity of demand 
% change in price

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 PRICE ELASTICITY OF DEMAND

TYPES OF ELASTICITY
TABLE 5.1 Hypothetical Demand Elasticities for Four Products
% CHANGE
% CHANGE IN QUANTITY
INPRICE DEMANDED ELASTICITY
PRODUCT (% DP) (% DQD) (% DQD ÷ %DP)
CHAPTER 5: Elasticity

Insulin +10% 0% 0.0 Perfectly inelastic

Basic telephone service +10% -1% -0.1 Inelastic
Beef +10% -10% -1.0 Unitarily elastic
Bananas +10% -30% -3.0 Elastic

perfectly inelastic demand Permintaan

dimana kuantitas diminta tidak responsif
terhadap seluruh perubahan harga

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 PRICE ELASTICITY OF DEMAND
CHAPTER 5: Elasticity

FIGURE 5.2 Perfectly Elastic and Perfectly Inelastic Demand

Curves

inelastic demand Permintaan yang kadang

responsif tetapi tidak besar, tehradap
perubahan harga. Permintaan inelastis
selalu memiliki nilai antara nol dan -1.
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 PRICE ELASTICITY OF DEMAND

A warning: You must be very careful about signs. Because it is generally understood
that demand elasticities are negative (demand curves have a negative slope), they are
often reported and discussed without the negative sign. For example, a technical paper
might report that the demand for housing “appears to be inelastic with respect to price,
or less than 1 (0.6).” What the writer means is that the estimated elasticity is -.6, which
is between zero and -1. Its absolute value is less than 1.
CHAPTER 5: Elasticity

unitary elasticity Hubungan

permintaan dimana persentase
perubahan kuantitas yang diminta
sama dengan persentase perubahan
harga pada nilai absolut
(a demand elasticity = -1).

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 8 of 29
 PRICE ELASTICITY OF DEMAND

elastic demand Hubungan

permintaan dimana persentase
perubahan kuantitas diminta lebih
besar dalam nilai absolut terhadap
perubahan harga
CHAPTER 5: Elasticity

(a demand elasticity > 1)

perfectly elastic demand Permintaan

dimana kuantitas turun ke titik nol
ketika ada sedikit kenaikan harga

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 PRICE ELASTICITY OF DEMAND

A good way to remember the difference between

the two “perfect” elasticities is:
CHAPTER 5: Elasticity

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 CALCULATING ELASTICITIES

CALCULATING PERCENTAGE CHANGES

To calculate percentage change in quantity demanded

using the initial value as the base, the following formula is
used:
CHAPTER 5: Elasticity

change in quantity demanded

% change in quantity demanded  x 100%
Q1

Q2 - Q1
 x 100%
Q1

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 CALCULATING ELASTICITIES

We can calculate the percentage change in price in a

similar way. Once again, let us use the initial value of P—
that is, P1—as the base for calculating the percentage. By
using P1 as the base, the formula for calculating the
percentage of change in P is simply:
CHAPTER 5: Elasticity

change in price
% change in price  x 100%
P1

P2 - P1
 x 100%
P1

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 CALCULATING ELASTICITIES

ELASTICITY IS A RATIO OF PERCENTAGES

Once all the changes in quantity demanded and price

have been converted into percentages, calculating
elasticity is a matter of simple division. Recall the formal
CHAPTER 5: Elasticity

definition of elasticity:

% change in quantity demanded

price elasticity of demand 
% change in price

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 CALCULATING ELASTICITIES

THE MIDPOINT FORMULA

midpoint formula Suatu cara akurat untuk
menghitung persentase dengan menggunakan
nilai tengah antara P1 and P2 sebagai dasar
menghitung persentase perubahan harga dan
CHAPTER 5: Elasticity

nilai tengah antara Q1 and Q2 sebagai dasar

untuk menghitung persentase perubahan
kuantitas diminta

change in quantity demanded

% change in quantity demanded  x 100%
(Q1  Q2 ) / 2

Q2 - Q1
 x 100%
(Q1  Q2 ) / 2

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 CALCULATING ELASTICITIES

Using the point halfway between P1 and P2 as the base for

calculating the percentage change in price, we get

change in price
% change in price  x 100%
( P1  P2 ) / 2
CHAPTER 5: Elasticity

P2 - P1
 x 100%
( P1  P2 ) / 2

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 CALCULATING ELASTICITIES

TABLE 5.2 Calculating Price Elasticity with the Midpoint Formula

First, Calculate Percentage Change in Quantity Demanded (% DQD):

change in quantity demanded Q2 - Q1

% change in quantity demanded  x 100%  x 100%
(Q1  Q2 ) / 2 (Q1  Q2 ) / 2

By substituting the numbers from Figure 5.1(a): PRICE ELASTICITY COMPARES THE
PERCENTAGE CHANGE IN QUANTITY
10  5 5 DEMANDED AND THE PERCENTAGE
% change in quantity demanded  x 100%  x 100% 66.7% CHANGE IN PRICE:
(5  10) / 2 7.5
CHAPTER 5: Elasticity

%QD 66.7%

Next, Calculate Percentage Change in Price (% DP): %P - 40.0%
1.67
change in price P2 - P1 PRICE ELASTICITY OF DEMAND
% change in price  x 100%  x 100% DEMAND IS ELASTIC
( P1  P2 ) / 2 ( P1  P2 ) / 2

By substituting the numbers from Figure 5.1(a):

2 3 -1
% change in price  x 100%  x 100% - 40.0%
(3  2) / 2 2.5

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 CALCULATING ELASTICITIES
ELASTICITY CHANGES ALONG A STRAIGHT-
LINE DEMAND CURVE

TABLE 5.3 Demand Schedule for Office

Dining Room Lunches
PRICE QUANTITY DEMANDED
(PER LUNCH) (LUNCHES PER MONTH)
CHAPTER 5: Elasticity

$11 0
10 2
9 4
8 6
7 8
6 10
5 12
4 14
3 16
2 18
1 20
0 22

FIGURE 5.3 Demand Curve for Lunch at

the Office Dining Room
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 Price elasticity of demand

Price elasticity Percentage change in Q

of demand =
Percentage change in P
CHAPTER 5: Elasticity

% CHANGE
% CHANGE IN QUANTITY
INPRICE DEMANDED ELASTICITY
PRODUCT (% DP) (% DQD) (% DQD ÷ %DP)

Insulin +10% 0% 0.0 Perfectly

inelastic

Basic +10% -1% -0.1 Inelastic

telephone
service
Beef +10% -10% -1.0 Unitarily
elastic
Bananas +10% -30% -3.0 Elastic
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 “Perfectly inelastic demand” (one extreme case)
Price % change in Q 0%
= = =0
elasticity % change in P 10%
of demand
D P
D
curve:
vertical
P1
Consumers’
CHAPTER 5: Elasticity

price P2
sensitivity:
0

Elasticity: Q
Q1
0
P falls Q changes
by
10% by 0%
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 “Inelastic demand”
Price % change in Q < 10%
= = <1
elasticity % change in P 10%
of demand
D curve: P
relatively steep
Consumers’ P1
CHAPTER 5: Elasticity

price sensitivity:
P2
relatively low D
Elasticit Q
y: Q1 Q2
<1
P falls Q rises
by less than
10% 10%
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 “Unit elastic demand”
Price % change in Q 10%
= = =1
elasticity % change in P 10%
of demand
D P
curve:
intermediate
slope P1
CHAPTER 5: Elasticity

Consumers’
price sensitivity:
P2
D
intermediate
Q
Elasticit Q1 Q2
1y:
P falls Q rises
by by 10%
© 2007 Prentice Hall Business Publishing
10%
Principles of Economics 8e by Case and Fair
 “Elastic demand”
Price % change in Q > 10%
= = >1
elasticity % change in P 10%
of demand
D P
curve:
relatively
flat P1
Consumers’
CHAPTER 5: Elasticity

price P2 D
sensitivity :
relatively high

Elasticit Q
Q1 Q2
y:
>1
P falls Q rises more
by than 10%
10%
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 “Perfectly elastic demand” (the other extreme)
Price % change in Q any %
= = =
elasticity % change in P 0% infinity
of demand
D P
curve:
horizontal
P2 = P1 D
CHAPTER 5: Elasticity

Consumers’
price
sensitivity:
extreme
Q
Elasticit Q1 Q2
y:
infinity P changes Q changes
by 0%
by any %
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 CALCULATING ELASTICITIES

ELASTICITY AND TOTAL REVENUE

Di Pasar, P x Q is total pendapatan (TR- total revenue)
yang diterima produsen:

TR = P x Q
total revenue = price x quantity
CHAPTER 5: Elasticity

Ketika harga (P) turun, jumlah diminta (QD) naik. Kedua

faktor, P dan QD, bergerak berlawanan :

Effects of price changes P  QD 

on quantity demanded: and
P  QD 

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 CALCULATING ELASTICITIES

TR naik naik sebagai respon oleh kenaikan harga

yang lebih besar, persentase kenaikan harga lebih besar
dibanding presentase penurunan jumlah diminta.

Effects of price increase on

a product with inelastic demand:  P x QD  TR 
CHAPTER 5: Elasticity

Jika persentase turunnya jumlah diminta lebih besar dari

persentase kenaikan harga, TR akan turun .

Effects of price increase on

a product with elastic demand:  P x QD  TR 

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 CALCULATING ELASTICITIES

Ketika permintaan elastis, penurunan harga akan

meningkatkan TR:

effect of price cut on a product

with elastic demand:  P x QD  TR 
CHAPTER 5: Elasticity

Ketika permintaan inelastis, penurunan harga akan

menyebabkan penurunan TR:

effect of price cut on a product

with inelastic demand:  P x QD  TR 

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 Price Elasticity and Total Revenue
Elastic demand
increased
(elasticity = 1.8)
P revenue
lost
due to
If P = $200, revenue
higher P
Q = 12 and due to
revenue = $2400. $250 lower Q
CHAPTER 5: Elasticity

$200
If P = $250,
Q = 8 and
D
revenue = $2000.

Q
8 12
When D is elastic,
a price increase
causes revenue to
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 Price Elasticity and Total Revenue
Now, demand is
inelastic = 0.82 increased
revenue
P due to lost
If P = $200, higher P revenue
Q = 12 and due to
revenue = $2400. $250 lower Q
CHAPTER 5: Elasticity

If P = $250, $200
Q = 10 and
revenue = $2500. D

When D is inelastic, Q
10 12
a price increase
causes revenue to
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 The Relationship between Elasticity and
Total Revenue
IF DEMAND IS

P ¯ Q ­ elastic if TR ­ (relative DQ> relative D P)

P  Q ­ inelastic if TR ¯ (relative DQ< relative D P)
CHAPTER 5: Elasticity

P ­ Q ¯ elastic if TR ¯ (relative DQ> relative D P)

P ­ Q ¯ inelastic if TR ­ (relative DQ< relative D P)

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 Elastisitas permintaan bergantung pada:

• Ketersediaan barang substitusi

• Pentingnya barang dalam anggaran perseorangan
CHAPTER 5: Elasticity

• Kerangka waktu yang digunakan

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 OTHER IMPORTANT ELASTICITIES

INCOME ELASTICITY OF DEMAND

income elasticity of demand Mengukur

respon permintaan terhadap perubahan
pendapatan.
CHAPTER 5: Elasticity

% change in quantity demanded

income elasticity of demand 
% change in income

Q/Q I Q
EI  
I/I Q I

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 OTHER IMPORTANT ELASTICITIES

CROSS-PRICE ELASTICITY OF DEMAND

cross-price elasticity of demand Sebuah

ukuran respon dari jumlah yang diminta
karena perubahan dalam harga barang
CHAPTER 5: Elasticity

lainnya.

% change in quantity of Y demanded

cross - price elasticity of demand 
% change in price of X

Qb/Qb Pm Qb
E Q b Pm  
Pm/Pm Qb Pm
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 Elastisitas harga silang dapat positif atau negatif.

Positif untuk barang substitusi

Negatif untuk barang komplemen

CHAPTER 5: Elasticity

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 OTHER IMPORTANT ELASTICITIES

ELASTICITY OF SUPPLY

elasticity of supply Sebuah ukuran respon

jumlah yang ditawarkan terhadap perubahan
harga barang tersebut. Cenderung positif di
CHAPTER 5: Elasticity

pasar output.

% change in quantity supplied

elasticity of supply 
% change in price

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 OTHER IMPORTANT ELASTICITIES

elasticity of labor supply Sebuah ukuran

respon tenaga kerja yang ditawarkan terhadap
perubahan harga tenaga kerja.
CHAPTER 5: Elasticity

% change in quantity of labor supplied

elasticity of labor supply 
% change in the wage rate

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 REVIEW TERMS AND CONCEPTS

cross-price elasticity inelastic demand

of demand midpoint formula
elastic demand perfectly elastic
CHAPTER 5: Elasticity

elasticity demand
elasticity of labor perfectly inelastic
supply demand
elasticity of supply price elasticity of
income elasticity of demand
demand unitary elasticity

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 Appendix

POINT ELASTICITY (OPTIONAL)

FIGURE 5A.1 Elasticity at a Point

Along a Demand Curve
CHAPTER 5: Elasticity

Consider the straight-line

demand curve in Figure 5A.1.
We can write an expression for
elasticity at point C as follows:

Q Q
100
%Q Q Q Q P1
elasticity    1  
%P P  P P Q1
100
P P1
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 Appendix

DQ/DP is the reciprocal of the slope of the curve. To calculate

the reciprocal of the slope to plug into the electricity equation,
we take Q1B, or M1, and divide by minus the length of line
segment CQ1. Thus,
Q M 1

P CQ1
CHAPTER 5: Elasticity

Since the length of CQ1 is equal to P1, we can write:

Q M 1

P P1
By substituting we get:
M 1 P1 M 1 P1 M1
elasticity     
P1 Q1 P1 M 2 M 2
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 Appendix

FIGURE 5A.2 Point Elasticity Changes

Along a Demand Curve
CHAPTER 5: Elasticity

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