Elasticity

is the rate of change of the

quantity demanded or

quantity supplied due to a

change in a variable.

Demand

Price Elasticity of Demand

measure of the responsiveness of the quantity demand for a good to a change in its price.

Degree of elasticity Characteristic Value of elasticity

Demand curve shape

Perfectly inelastic

If the % of ∆ in Qd is not sensitive to the % of ∆ in price

Ed = 0 Vertical

Inelastic If the % of ∆ in Qd is bigger than the

% of ∆ in price

0 < Ed < 1 Steep

Unitary elastic If the % of ∆ in Qd is equivalent to

the % of ∆ in price

Ed = 1 Hyperbola

Elastic If the % of ∆ in Qd is smaller than the

% of ∆ in price

1 < Ed < ∞

Tilted

Perfectly elastic If the % of ∆ in Qd is infinity to the %

of ∆ in price

Ed = ∞ Horizontal

Relationship between Price Elasticity of Demand & Total Revenue

Degree of Elasticity Characteristics Change in TR Perfectly inelastic If P , the % change for Q is insensitive TR remains

If P , the % change for Q is insensitive TR Inelastic If P , the % of for Q is smaller. TR

If P , the % of Q is smaller. TR Unitary elastic If P , the % of for Q is similar TR remains

If P , the % of Q is similar. Elastic If P , the % of for Q is more significant. TR

If P , the % of Q is more significant. TR Perfectly elastic If P , the % of for Q is infinity. TR

If P , the % of Q is null. TR = 0

Factors Affecting Price Elasticity of Demand

Availability of Substitutes

Proportion of Expenses from Income

Number of Uses Importance

Time Period Consumer Habit

Branding

Income Elasticity

Measures the responsiveness or

sensitivity of changes in the

quantity demanded for a product due to a

change in income

Relationship between the value of income elasticity of demand and types

of goodsValue of income elasticity of demand (Ey)

Types of goods

Positive Normal goods

Ey = 1 Superior

0 < Ey < 1 Essential

1 < Ey < ∞ Luxuries

Negative Inferior goods

Zero (Ey = 0) Necessity goods

Cross ElasticityMeasures the

responsiveness or sensitivity of

quantity demanded for a product due to a

change in the price of a related

product

The relationship between two goods from the value of cross elasticity of

demand

Value of cross elasticity of

demand (Exy)

Relationship between two goods

Negative Complementary goods

Positive Substitute goods

Zero Non-related goods

Supply

Price Elasticity of Supply

Measures the sensitivity or

responsiveness of the quantity

supplied due to a change in the price

of a product or service.

Elasticity of coefficient

Terms Explanation Diagrams

Ess > 1 Elastic A small percentage

change in price will lead to a large

percentage change in the

quantity supplied

Ess < 1 Inelastic A large percentage

change in price will only affect a small percentage of the quantity

supplied

Ess = 1 Unitary elastic A percentage change in price

equals the percentage

change in the quantity supplied

Ess = 0 Perfectly

inelastic A percentage

change in price has no effect on the percentage change in the

quantity supplied

Ess = ∞ Perfectly elastic An almost zero

percentage change in price brings about a

very large percentage

change in the quantity supplied

Factors Affecting the Price Elasticity of Supply