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```Elasticity
Elasticity
A quantitative tool of analysis used to measure
__________________, or the precise change in one thing given a
specific change in another.
Popular Measures of Elasticity
• Price Elasticity of Demand
• Income Elasticity of Demand
• Price Elasticity of Supply
• Cross elasticity of demand
Popular Uses of Elasticity
•
To describe the impact of changes in market conditions on
equilibrium, and predict the outcome for consumers and
•
To study the impact of price changes on the revenue of a
To classify goods
To explain why business firms tend to charge more for certain
goods, and why certain goods bear the greater burden of
taxation.
To describe and explain the relationship between two
variables over time.
In general, elasticity is ______________________________
____________________________________.
•
•
•
•
Price Elasticity of Demand
Measures the response in quantity demanded to changes in price.
It is the percentage
change in quantity
demanded given a
percentage change in
price.
For example, when e = 0.2, a 10% increase in price leads to a 2%
decrease in quantity demanded. When e = 2.0, a 10% increase in
price leads to a _____ decrease in quantity demanded.
Note: The value of demand elasticity will always be negative
because of the inverse relationship between price and quantity
demanded. However, ____________________________: equal
to one, less than one, or greater than one.
Characteristics of Demand Elasticity
Value of Type of Demand
Elasticity
Elastic
e>1
Inelastic
e<1
Unitary elastic
e=1
Magnitudes of
Change
Response to
Price Changes
%QD > %P
___________
%QD < %P
___________
%QD = %P
Proportional
The main determinant of demand elasticity is _______________
____________________ for the good in question.
Type of
Elasticity
Substitutes
Available
Elastic
_______
Inelastic
_______
Shape of Demand According to Elasticity
Type of Demand
Inclination
Elastic
____________
Inelastic
____________
Unitary Elastic
____________
Extreme Elasticities
Elasticity Value
Type of Elasticity
Substitutes Available
_____
Perfectly Inelastic
___________
_____
Perfectly Elastic
___________
Elasticity Formulas
Point Elasticity
Formula
Arc or Midpoint Elasticity
Formula
Elasticity Versus the Slope of Demand
Elasticity is similar but not the same as the slope of demand. The
slope is an unreliable indicator of sensitivity. Elasticity is a more
precise measure used to describe the behavior of two related
variables, in percentage terms.
Computing the Value of Elasticity
Use the Arc Elasticity formula to determine the price elasticity of
demand for tennis lessons:
When the price of tennis lessons is
\$20.00, the number of students is
12.
When the price goes up to \$25.00,
the number of students drops to
10.
What is the value of elasticity?
e = ____
Elasticity Along a Downward-sloping, Linear
Demand Curve
Computing the Value of Elasticity
e = _____
e = _____
Elasticity and Total Revenue
The total revenue of a business firm is the amount of money
obtained from ___________________.
Total Revenue = _________________
By obtaining information about the elasticity of demand for the
good it produces, a firm can _____________________________
______________________.
For example, when a good has a relatively elastic demand, a
higher price will cause a substantial decrease in quantity
demanded. On the other hand, a price decrease will cause a
substantial increase in quantity demanded. Lower prices may
Elasticity, Demand and Total Revenue
Price Quantity
1.0
2.0
10.0
110
100
20
11.0
10
5.5
55
Total Revenue
Total Revenue is maximum
when _____.
Elasticity, Total Revenue and Price Changes
Income Elasticity of Demand
Percentage change in the
quantity demanded of a
good given a percentage
change in _______.
Classification of Goods According to Income Elasticity:
Income Elasticity
Type of Good
Responsiveness
e i> 0
Income  QD
ei<0
Income  QD
ei>1
% QD > % I
ei<1
% QD < % I
Cross Elasticity of Demand
Shows the responsiveness in
quantity demanded of one
good given a change in ___
__________________.
Classification of Goods According to Cross Elasticity:
Cross Elasticity
Relationship
Responsiveness
e xy > 0
Py   Qx
e xy < 0
Py   Qx
Price Elasticity of Supply
Measures the response in quantity supplied to changes in price.
Is the percentage
change in quantity
supplied given a
percentage change in
price.
Interpreting the Value of Supply Elasticity:
Value of
Elasticity
Type of
Supply
Response to
price changes
Response to
price changes
e>1
Elastic
%QS > %P
___________
e<1
Inelastic
%QS < %P
___________
e=1
Unitary
%QS = %P
___________
Shape of Supply According to Elasticity
Elasticity Value
Type of Supply
Inclination
e>1
Relatively Elastic
___________________
e<1
Relatively Inelastic ___________________
e=1
Unitary Elastic
___________________
e=
Perfectly Elastic
__________________
e=0
Perfectly Inelastic
___________________
Shape of Supply According to Elasticity
Elasticity and Time
Supply and demand tend to be _________________________
________________________.
Supply Elasticity and Capacity Utilization
Supply tends to be elastic when _____________________, and
inelastic when _______________________.
Elasticity and Tax Burdens
The ability of the government to collect tax revenue depends to a
great extent on _____________________.
The government can collect more revenue by taxing goods with
____________________.
Ramsey Pricing is the concept that greater equity in taxation is
accomplished by ____________________________________
_________________.
Elasticity and Tax Burdens
Since demand is elastic,
___________________
_______________.
Suppose that the government
imposes a tax of 20 cents to be
collected by producers on each
unit of output sold.
The tax __________________
________________________
________________.
The market settles in
equilibrium at 40 units of
output sold at \$1.05.
Producers collect \$1.05 for
each unit of output sold, and
pay the government 20 cents.
only 85 cents per unit sold.
Elasticity and Tax Burdens
The same tax has a different
incidence when demand is
inelastic.
The market settles in
equilibrium at 46 units of
output sold at \$1.15.
Producers collect \$1.15 for
each unit of output sold, and
pay the government 20 cents.
Since demand is inelastic,
__________ bear the greater
burden of the tax.
only 95 cents per unit sold.
Elasticity and Tax Burdens
When demand is elastic, the loss
to producers ________ than the
loss to consumers, and the
deadweight loss to society as a
whole is ______.
When demand is inelastic, the
loss to consumers is _______
than the loss to producers, and