,ACCESS Test Bank for Microeconomics 14th Edition Parkin
h a p t e r
4 ELASTICITY
The Big P i c tur e
Where we have been:
The student can now use the demand and supply model to generate predictions and can supplement
this knowledge with the ability to provide richer predictions based on the elasticities of demand and
supply.
Where we are going:
Demand, supply, and demand elasticity get an extensive workout in Chapter 6, where we use them to
explain the division of a tax burden between buyer and seller and the impact of price controls and
quotas. However, before doing that analysis, we study the efficiency and fairness of markets in
Chapter 5. Students will also apply elasticity in Chapter 12 to describe demand in perfect
competition. In Chapter 13, we study the relationship between total revenue and the price elasticity
of demand to show that a monopoly never operates on the inelastic part of the demand curve.
Ne w in the F o ur t e e n t h E d i t i o n
There are only a few minor changes to this chapter. The chapter opening example and the Economics in
the News case study focus on using elasticity to determine quantitative effects—how much the price or
quantity change—due to changes caused by the Covid-19 pandemic.
© 2023 Pearson Education, Inc.
mynursytest.store
, ACCESS Test Bank for Microeconomics 14th Edition Parkin
36 CHAPTE R 4
Lectur e Notes
Elasticity
The price elasticity of demand measures how strongly buyers respond to a change in the price of a good.
The price elasticity of demand can be used to make quantitative predictions of how changes affect the price
and quantity demanded of a good.
The income elasticity of demand measures how strongly demanders respond to a change in income, and the
cross elasticity of demand measures how strongly demanders respond to the change in the price of another good.
The price elasticity of supply measures how strongly producers respond to a change in the price of a good.
I. Price Elasticity of Demand
In general, elasticity measures responsiveness. The price elasticity of demand measures how responsive
demanders are to a change in the price of the good. This information is often useful for both businesses and
governments because it can predict the impact of a price change on total revenue or total expenditure.
Calculating Price Elasticity of Demand
The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of
a good to a change in its price when all other influences on a buyer’s plans remain unchanged. The price
elasticity of demand is equal to the absolute value of:
The formulas for calculating all of the elasticities in the text are based on the arc elasticity or mid-point formula,
meaning the percentage changes are always calculated based on the average price (or income in the case of income
elasticity) and average quantity over the range of change. If you ask students to calculate elasticities, it is important to
practice calculating the percentage change using the average as the basis as it is not likely to be familiar Don’t be
afraid to start with this pre-elasticity warm up to assess the sharpness of your class. Ask: “Suppose that the campus
bookstore increases the price of an economics text from $75 to $100. What is the percentage increase in price?” Many
will say 25 percent. But using the midpoint formula the percentage change is ($25/$87.50) × 100, which is 28.6
percent.
Devise a mnemonic for elasticity calculations. Many students have a hard time remembering whether quantity or
price goes in the numerator of the elasticity formulas. Have the students create their own mnemonic. Suggest
McDonald’s Quarter Pounder™ hamburgers. It’s silly, but it works, reminding the student that Q (quantity) appears
before P (price) in the ratio of percentage changes.
The demand elasticity formula yields a negative value because price and quantity move in opposite
directions. However, it is the magnitude, or absolute value, of the measure that reveals how responsive the
quantity change has been to a price change. So, we use the magnitude or the absolute value of the price
elasticity of demand.
The table to the right has two points on the demand
curve for pizza from a particular pizza parlor. Price Quantity demanded
(dollars per pizza) (pizzas per week)
The absolute value of the percent change in
14 500
quantity demanded is [(500 400) 450] 100 = 16 400
22.2 percent.
The absolute value of the percentage change in
price is [($14 $16) $15] 100 = 13.3 percent.
Between these two points on the demand curve, the price elasticity of demand is 22.2% 13.3% = 1.67.
Elasticity is not the same as slope. Students sometimes wonder why we don’t just measure the slope of the demand
curve to measure responsiveness. Point out to the students that the slope will change when the units change. For
instance, you can compute the slope of a demand curve when the price is measured in dollars and then the slope of
the exact same demand curve when the price is measured in cents. The slope with the price measured in cents is 100
© 2023 Pearson Education.
mynursytest.store
, ACCESS Test Bank for Microeconomics 14th Edition Parkin
EL A S T I CI TY 37
times as large as the initial slope. Tell the students that it is not acceptable for the measure of responsiveness to change
whenever the units of the price (or of the quantity) change.
Inelastic and Elastic Demand
If the price elasticity of demand is less than 1.0, the good is said to have an inelastic demand. In this case,
the percentage change in the quantity demanded is less than the percentage change in price.
If the quantity demanded remains constant when the price changes, then the good is said to have
perfectly inelastic demand. The price elasticity of demand is 0 and the good’s demand curve is a
vertical line.
If the price elasticity of demand is equal to 1.0, the good is said to have a unit elastic demand. In this
case, the percentage change in the quantity demanded equals the percentage change in price.
If the price elasticity of demand is greater than 1.0, the good is said to have an elastic demand. In this
case, the percentage change in the quantity demanded exceeds the percentage change in price.
If the quantity demanded changes by an infinitely large percentage in response to a tiny price change,
then the good is said to have perfectly elastic demand. Furniture 1.26
The price elasticity of demand is infinite. Motor Vehicles 1.14
The table has some “real-life” elasticities from the book. Clothing 0.64
Oil 0.05
This application shows real-world price elasticities of demand for a variety of goods and services as well as a table with
various food elasticities. This data can be a base for discussion of the factors that might lead one item to be more
elastic than the other and allow students in real-time to try to explain and apply price elasticity of demand.
Economics in the News: The Elasticity of Demand for Peanut Butter
The price elasticity of demand for peanut butter is the basis for this application. Further discussion of other demand
elasticities for peanut butter will be explored after those elasticities are introduced.
Elasticity Along a Linear Demand Curve
With the exception of a vertical demand curve and a
horizontal demand curve (along which the elasticity is
0 and infinite, respectively) the price elasticity of demand
changes when moving along a linear demand curve.
As the figure illustrates, at points on the demand
curve above the midpoint, the price elasticity of
demand is elastic while at points below the midpoint,
the price elasticity of demand is inelastic. At the
midpoint, the price elasticity of demand is unit elastic.
Total Revenue and Elasticity
The total revenue from the sale of a good equals
the price of the good multiplied by the quantity sold.
If demand is elastic, a 1 percent price cut increases the quantity
sold by more than 1 percent and total revenue increases.
If demand is unit elastic, a 1 percent price cut increases the
quantity sold by 1 percent and total revenue does not change.
If demand is inelastic, a 1 percent price cut increases the
quantity sold by less than 1 percent and total revenue decreases.
The total revenue test is a method of estimating the price elasticity of demand by observing the change
in total revenue that results from a change in price when all other influences on the quantity sold remain the
same.
If a price cut increases total revenue, demand is elastic. And if a price hike decreases total revenue,
demand is elastic.
© 2023 Pearson Education, Inc.
mynursytest.store
h a p t e r
4 ELASTICITY
The Big P i c tur e
Where we have been:
The student can now use the demand and supply model to generate predictions and can supplement
this knowledge with the ability to provide richer predictions based on the elasticities of demand and
supply.
Where we are going:
Demand, supply, and demand elasticity get an extensive workout in Chapter 6, where we use them to
explain the division of a tax burden between buyer and seller and the impact of price controls and
quotas. However, before doing that analysis, we study the efficiency and fairness of markets in
Chapter 5. Students will also apply elasticity in Chapter 12 to describe demand in perfect
competition. In Chapter 13, we study the relationship between total revenue and the price elasticity
of demand to show that a monopoly never operates on the inelastic part of the demand curve.
Ne w in the F o ur t e e n t h E d i t i o n
There are only a few minor changes to this chapter. The chapter opening example and the Economics in
the News case study focus on using elasticity to determine quantitative effects—how much the price or
quantity change—due to changes caused by the Covid-19 pandemic.
© 2023 Pearson Education, Inc.
mynursytest.store
, ACCESS Test Bank for Microeconomics 14th Edition Parkin
36 CHAPTE R 4
Lectur e Notes
Elasticity
The price elasticity of demand measures how strongly buyers respond to a change in the price of a good.
The price elasticity of demand can be used to make quantitative predictions of how changes affect the price
and quantity demanded of a good.
The income elasticity of demand measures how strongly demanders respond to a change in income, and the
cross elasticity of demand measures how strongly demanders respond to the change in the price of another good.
The price elasticity of supply measures how strongly producers respond to a change in the price of a good.
I. Price Elasticity of Demand
In general, elasticity measures responsiveness. The price elasticity of demand measures how responsive
demanders are to a change in the price of the good. This information is often useful for both businesses and
governments because it can predict the impact of a price change on total revenue or total expenditure.
Calculating Price Elasticity of Demand
The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of
a good to a change in its price when all other influences on a buyer’s plans remain unchanged. The price
elasticity of demand is equal to the absolute value of:
The formulas for calculating all of the elasticities in the text are based on the arc elasticity or mid-point formula,
meaning the percentage changes are always calculated based on the average price (or income in the case of income
elasticity) and average quantity over the range of change. If you ask students to calculate elasticities, it is important to
practice calculating the percentage change using the average as the basis as it is not likely to be familiar Don’t be
afraid to start with this pre-elasticity warm up to assess the sharpness of your class. Ask: “Suppose that the campus
bookstore increases the price of an economics text from $75 to $100. What is the percentage increase in price?” Many
will say 25 percent. But using the midpoint formula the percentage change is ($25/$87.50) × 100, which is 28.6
percent.
Devise a mnemonic for elasticity calculations. Many students have a hard time remembering whether quantity or
price goes in the numerator of the elasticity formulas. Have the students create their own mnemonic. Suggest
McDonald’s Quarter Pounder™ hamburgers. It’s silly, but it works, reminding the student that Q (quantity) appears
before P (price) in the ratio of percentage changes.
The demand elasticity formula yields a negative value because price and quantity move in opposite
directions. However, it is the magnitude, or absolute value, of the measure that reveals how responsive the
quantity change has been to a price change. So, we use the magnitude or the absolute value of the price
elasticity of demand.
The table to the right has two points on the demand
curve for pizza from a particular pizza parlor. Price Quantity demanded
(dollars per pizza) (pizzas per week)
The absolute value of the percent change in
14 500
quantity demanded is [(500 400) 450] 100 = 16 400
22.2 percent.
The absolute value of the percentage change in
price is [($14 $16) $15] 100 = 13.3 percent.
Between these two points on the demand curve, the price elasticity of demand is 22.2% 13.3% = 1.67.
Elasticity is not the same as slope. Students sometimes wonder why we don’t just measure the slope of the demand
curve to measure responsiveness. Point out to the students that the slope will change when the units change. For
instance, you can compute the slope of a demand curve when the price is measured in dollars and then the slope of
the exact same demand curve when the price is measured in cents. The slope with the price measured in cents is 100
© 2023 Pearson Education.
mynursytest.store
, ACCESS Test Bank for Microeconomics 14th Edition Parkin
EL A S T I CI TY 37
times as large as the initial slope. Tell the students that it is not acceptable for the measure of responsiveness to change
whenever the units of the price (or of the quantity) change.
Inelastic and Elastic Demand
If the price elasticity of demand is less than 1.0, the good is said to have an inelastic demand. In this case,
the percentage change in the quantity demanded is less than the percentage change in price.
If the quantity demanded remains constant when the price changes, then the good is said to have
perfectly inelastic demand. The price elasticity of demand is 0 and the good’s demand curve is a
vertical line.
If the price elasticity of demand is equal to 1.0, the good is said to have a unit elastic demand. In this
case, the percentage change in the quantity demanded equals the percentage change in price.
If the price elasticity of demand is greater than 1.0, the good is said to have an elastic demand. In this
case, the percentage change in the quantity demanded exceeds the percentage change in price.
If the quantity demanded changes by an infinitely large percentage in response to a tiny price change,
then the good is said to have perfectly elastic demand. Furniture 1.26
The price elasticity of demand is infinite. Motor Vehicles 1.14
The table has some “real-life” elasticities from the book. Clothing 0.64
Oil 0.05
This application shows real-world price elasticities of demand for a variety of goods and services as well as a table with
various food elasticities. This data can be a base for discussion of the factors that might lead one item to be more
elastic than the other and allow students in real-time to try to explain and apply price elasticity of demand.
Economics in the News: The Elasticity of Demand for Peanut Butter
The price elasticity of demand for peanut butter is the basis for this application. Further discussion of other demand
elasticities for peanut butter will be explored after those elasticities are introduced.
Elasticity Along a Linear Demand Curve
With the exception of a vertical demand curve and a
horizontal demand curve (along which the elasticity is
0 and infinite, respectively) the price elasticity of demand
changes when moving along a linear demand curve.
As the figure illustrates, at points on the demand
curve above the midpoint, the price elasticity of
demand is elastic while at points below the midpoint,
the price elasticity of demand is inelastic. At the
midpoint, the price elasticity of demand is unit elastic.
Total Revenue and Elasticity
The total revenue from the sale of a good equals
the price of the good multiplied by the quantity sold.
If demand is elastic, a 1 percent price cut increases the quantity
sold by more than 1 percent and total revenue increases.
If demand is unit elastic, a 1 percent price cut increases the
quantity sold by 1 percent and total revenue does not change.
If demand is inelastic, a 1 percent price cut increases the
quantity sold by less than 1 percent and total revenue decreases.
The total revenue test is a method of estimating the price elasticity of demand by observing the change
in total revenue that results from a change in price when all other influences on the quantity sold remain the
same.
If a price cut increases total revenue, demand is elastic. And if a price hike decreases total revenue,
demand is elastic.
© 2023 Pearson Education, Inc.
mynursytest.store
