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Preview to Elasticity:
Elasticity Concept
The elasticity concept measures how sensitive:
Price elasticity of demand
Income elasticity of demand
Cross price elasticity of demand
Price elasticity of supply
the quantity demanded of a good is to its own price
the quantity demanded is to income
the quantity demanded of one good is to the price of another good.
Outline:
A. Price Elasticity of Demand
1. Definition
2. What the slope of the demand curve implies about the sign of the price elasticity of demand
3. Computation – Non-calculus method
4. Computation – Calculus method
5. Classifying the magnitude of the elasticity of demand – elastic, unitary, inelastic
6. Verbal interpretation of price elasticity of demand
7. Relationship between the price elasticity of demand and consumer expenditure on the good
B. Other Elasticities of Demand and Supply
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A. Price Elasticity of Demand
1. Definition
The price elasticity of demand (for gasoline) is
2. What the slope of the demand curve implies about the sign of the price elasticity of demand
3. Computation - Non-calculus method
Reminder about the general idea of a percentage change:
A percentage change in price is the change in price divided by the price.
To compute the price elasticity of demand we need information about the quantity demanded for at least two different prices (with all factors other
than the price of the good held constant).
Price of a
gallon of gas
Income
Price of a Bus Gallons Gasoline
Ride
Demanded Per
Wk
$1.10
I=$40,000/yr
$0.75
1020
$1.20
I=$40,000/yr
$0.75
1000
$1.30
I=$40,000/yr
$0.75
990
Price Elas. of
Demand
(using 1st P&Q
listed)
Price Elas. of
Demand
(using 2nd P&Q
listed)
Price Elas. of
Demand
(arc method)
4. Computation – Calculus Method
By definition,  Q , p 
%Q d
%p
Applying the calculus method of computing the price elasticity of demand to a linear D curve:
Qd = a – bp
$/unit
units/ time period
Point as labeled on
the Demand Curve
1
2
3
4
5
Qd
p
 Q, p
dQ d / dp

Qd / p
5. Classification of the magnitude of the elasticity of demand
6. Verbal interpretation of the elasticity of demand
7. Relationship between Elasticity and Consumer Expenditure
The number of units demanded at price p is D(p) and the total expenditure on the good is
We want to examine the effect of a change in p on total expenditure.
Elasticity of the Demand Curve
Change in Price
Inelastic
P↑
Unitary Elastic
P↑
Elastic
P↑
Change in Quantity
Demanded
Change in Expenditure
B. Other Elasticities of Demand or Supply
Data needed to compute by non calculus
method
Income Elasticity of Demand
Price Elasticity of Supply
Cross Price Elasticity of Demand
If the two goods are complementary, is the sign
positive or negative?\
If the two goods are substitutes, is the sign
positive or negative?
Calculus Method