ECO 1ELASTICITY: THE RESPONSIVESS OF DEMAND AND SUPPLY

Erkmen Giray ASLIM (erkmengirayaslim.com)

e-mail: era314@Lehigh.edu

09/11/2015

Department of Economics

Lehigh University

DEFINING ELASTICITY

• What is elasticity? & Why do we care?

• It is a measure. There is a numerical representation. • ex. Price elasticity of demand = -2.5

• How much one economic variable responds to changes in another economic variable?

• Think about bookstores or coffee shops – Price change & QD?

• Responsiveness of the quantity demanded with respect to a change in price.

• Price elasticity of demand - Is it important to know this?

DEFINING ELASTICITY

• Why don’t we use the slope to measure price elasticity?

• We can but there are drawbacks.

• Slope is sensitive to units.

• Ex. $1 per gallon decrease in gasoline leads to 0.1 million change in the QD of gasoline: 0.1/- 1 = -0.1, in cents : 0.1/-100= -0.001.

• We use percentage changes for the price elasticity of demand.

• i.e. 10 percent more gasoline – it is not dependent on units.

• LESSON: Elasticity is not the same as the slope!

PRICE ELASTICITY FORMULA

• The price elasticity of demand is always negative!• But we usually compare relative sizes between goods. So,

we can take the absolute value. (-2 vs. -1)

• We have 3 cases: Elastic demand (> 1), Inelastic demand(< 1), and Unit-elastic demand(= 1).• i.e. 20% / -10% (bagel) or 5% / -10% (wheat)

• What is the price elasticity of supply, cross-price elasticity of demand, and income elasticity of demand?

REAL-WORLD ELASTICITIES

EXAMPLE OF COMPUTING ELASTICITIES

A to B (P decrease): 20/-7.5 = -2.7 & B to A (P increase): -16.7/8.1=-2.1

THE MIDPOINT FORMULA

• Ensures that we have only one value by averaging!

Price elasticity of demand =

SOLVING THE PROBLEM

SUMMARIZEIf demand is… then the absolute value

of price elasticity is…

SUMMARIZEIf demand is… then the absolute value

of price elasticity is…

SUMMARIZE

If demand is… then the absolute value of price elasticity is…