CHAPTER 6: ELASTICITY
INTRODUCTION
In previous chapters, we looked at supply and demand. In this chapter we focus on the responsiveness
of the quantity demanded and the quantity supplied to changes in price and other determinants of
the quantity demanded and the quantity supplied. In other words, how sensitive are consumers and
producers to price changes.
9.1 INTRODUCTION
ELASTICITY
Elasticity is a measure of sensitivity. When two variables are related, one often wants to know how
sensitive the first is to changes in the second.
In econmics there are four types of elasticities, which include:
E pD Price elasticity of demand
EYD Income elasticity of demand
D
E xp
Cross-price elasticity of demand
E pS
Price elasticity of supply
6.2 PRICE ELASTICITY OF DEMAND (PED) AND SUPPLY (6.4)
DEMAND
PED is the % ▲ in the Qd if the price of the product ▲ by 1 %
%Q
%P
When calculating PED, you will have to categorise your answer into one of the categories above.
LECTURER NOTES | ECON 112 CHAPTER 6
, SUPPLY
Price elasticity of supply measures producer’s reaction to price changes
PES is the % ▲ in the Qs if the price of the product ▲ by 1 %
%QS Elastic
Ep
S ∞
%P
Relative elastic
(>1)
Relative
inelastic (0-1)
Inelastic
(0)
Unitary elastic
(1)
When calculating PED, you will have to categorise your answer into one of the categories above.
Categories of elasticity
Please note that the same categories are used for the price elasticity of supply. The only
difference is we use a supply curve and not a demand curve.
Perfectly elastic
Any Q at one P
E = I∞I
Consumers are
extremely sensitive
to price changes. A
small change in price
will result in quantity
dropping to zero.
LECTURER NOTES | ECON 112 CHAPTER 6
INTRODUCTION
In previous chapters, we looked at supply and demand. In this chapter we focus on the responsiveness
of the quantity demanded and the quantity supplied to changes in price and other determinants of
the quantity demanded and the quantity supplied. In other words, how sensitive are consumers and
producers to price changes.
9.1 INTRODUCTION
ELASTICITY
Elasticity is a measure of sensitivity. When two variables are related, one often wants to know how
sensitive the first is to changes in the second.
In econmics there are four types of elasticities, which include:
E pD Price elasticity of demand
EYD Income elasticity of demand
D
E xp
Cross-price elasticity of demand
E pS
Price elasticity of supply
6.2 PRICE ELASTICITY OF DEMAND (PED) AND SUPPLY (6.4)
DEMAND
PED is the % ▲ in the Qd if the price of the product ▲ by 1 %
%Q
%P
When calculating PED, you will have to categorise your answer into one of the categories above.
LECTURER NOTES | ECON 112 CHAPTER 6
, SUPPLY
Price elasticity of supply measures producer’s reaction to price changes
PES is the % ▲ in the Qs if the price of the product ▲ by 1 %
%QS Elastic
Ep
S ∞
%P
Relative elastic
(>1)
Relative
inelastic (0-1)
Inelastic
(0)
Unitary elastic
(1)
When calculating PED, you will have to categorise your answer into one of the categories above.
Categories of elasticity
Please note that the same categories are used for the price elasticity of supply. The only
difference is we use a supply curve and not a demand curve.
Perfectly elastic
Any Q at one P
E = I∞I
Consumers are
extremely sensitive
to price changes. A
small change in price
will result in quantity
dropping to zero.
LECTURER NOTES | ECON 112 CHAPTER 6
