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‫اﻻﺧﺘﺒﺎر اﻻول ‪ 20‬ﻓﺒﺮاﻳﺮ‬

‫‪ELASTICITY‬‬
‫ﺷﺎﺑﺘﺮ ‪ 3 + 2 + 1‬ﺟﺰء اﻟﻄﻠﺐ ﻓﻘﻂ‬
After studying this chapter, you will be able to:
 Define, calculate, and explain the factors that
influence the price elasticity of demand
 Define, calculate, and explain the factors that
influence the income elasticity of demand and
the cross elasticity of demand
 Define, calculate, and explain the factors that
influence the elasticity of supply

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 Price Elasticity of Demand

In Figure 4.1(a), an
increase in supply
brings
 A large fall in price
 A small increase in
the quantity demanded

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 Price Elasticity of Demand

In Figure 4.1(b), an
increase in supply
brings
 A small fall in price
 A large increase in
the quantity
demanded

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 Price Elasticity of Demand
The contrast between the two outcomes in Figure
4.1 highlights the need for
 A measure of the responsiveness of the
quantity demanded to a price change.
The price elasticity of demand is a measure of the
responsiveness of the quantity demanded of a
good to a change in its price when all other
influences on buyers’ plans remain the same.

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 Price Elasticity of Demand

Calculating Elasticity

The price elasticity of demand =

Percentage change in quantity demanded

Percentage change in price

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 Calculating Price Elasticity of
Demand
Price Elasticity of Demand =

 Q  % Q
 Q Q

 P %
P
 P
P

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 Price Elasticity of Demand
To calculate the price elasticity of demand:
We express the change in price as a
percentage of the average price—the average
of the initial and new price,
and we express the change in the quantity
demanded as a percentage of the average
quantity demanded—the average of the initial
and new quantity.

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 Price Elasticity of Demand

Figure 4.2 calculates

the price elasticity of
demand for pizza.
The price initially is
$20.50 and the
quantity demanded is
9 pizzas an hour.

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 Price Elasticity of Demand
The price falls to
$19.50 and the
quantity demanded
increases to 11 pizzas
an hour.
The price falls by $1
and the quantity
demanded increases
by 2 pizzas an hour.

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 Average Price and Quantity
You have the following table:
Calculate the price elasticity of demand:
The Original The New The Average
Point Point

P1= 20.5 P2 = 19.5 P aver= 20

Q1= 9 Q 2 = 11 Q aver= 10

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 Price Elasticity of Demand

The average price is

$20 and the average
quantity demanded is
10 pizzas an hour.

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 Price Elasticity of Demand

The percentage change

in quantity demanded,
%Q, is calculated as
Q/Qave, which is 2/10 =
1/5.
The percentage change
in price, %P, is
calculated as P/Pave,
which is -$1/$20 = 1/20.

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 Price Elasticity of Demand

The price elasticity of

demand is
%Q/ %P = (1/5)/
(1/20) = 20/5
= 4

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 Price Elasticity of Demand

The formula yields a negative value,

because price and quantity move in
opposite directions.
But it is the magnitude, or absolute
value, of the measure that reveals
how responsive the quantity change
has been to a price change.

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 Price Elasticity of Demand
The ratio of two proportionate changes is the
same as the ratio of two percentage
changes.
The measure is units free because it is a
ratio of two percentage changes and the
percentages cancel out.
Changing the units of measurement of price
or quantity leave the elasticity value the
same.

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 Price Elasticity of Demand
Inelastic and Elastic Demand
Demand can be inelastic, unit elastic, or
elastic, and can range from zero to
infinity.
If the quantity demanded doesn’t
change when the price changes, the
price elasticity of demand is zero and
the good as a perfectly inelastic
demand.

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 Price Elasticity of Demand

Figure 4.3(a)
illustrates the case of
a good that has a
perfectly inelastic
demand.
The demand curve is
vertical.

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 Price Elasticity of Demand
If the percentage change
in the quantity demanded
equals the percentage
change in price, …
the price elasticity of
demand equals 1 and the
good has unit elastic
demand.
Figure 4.3(b) illustrates
this case—a demand
curve with ever declining
slope.
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 Price Elasticity of Demand
If the percentage change in the quantity demanded is
smaller than the percentage change in price,
 the price elasticity of demand is less than 1 and the
good has inelastic demand.
If the percentage change in the quantity demanded is
greater than the percentage change in price,
 the price elasticity of demand is greater than 1 and
the good has elastic demand.

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 Price Elasticity of Demand
If the percentage change in
the quantity demanded is
infinitely large when the
price barely changes, …
the price elasticity of
demand is infinite and the
good has a perfectly elastic
demand.
Figure 4.3(c) illustrates the
case of perfectly elastic
demand—a horizontal
demand curve.

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 Price Elasticity of Demand
Elasticity Along a
Straight-Line
Demand Curve
Figure 4.4 shows
how demand
becomes less
elastic as the price
falls along a linear
demand curve.

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 Elasticity Along a straight-
Line Demand Curve
Elasticity decreases as the price falls and
quantity demanded increases.
At midpoint of a demand curve , the demand is
unit elastic.
Above the midpoint of a demand curve , the
demand is elastic.
Below the midpoint of a demand curve , the
demand is inelastic.

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 Elasticity Along a straight-
Line Demand Curve
The following figures illustrate the
calculation of elasticity along a straight
line. And the results as follows:

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 Price Elasticity of Demand

At prices above the

mid-point of the
demand curve,
demand is elastic.

At prices below the

mid-point of the
demand curve,
demand is inelastic.

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 Price Elasticity of Demand
For example, if the price
falls from $25 to $15,
the quantity demanded
increases from 0 to 20
pizzas an hour.
The average price is
$20 and the average
quantity
is 10 pizzas.
The price elasticity of
demand is (20/10)/
(10/20), which equals 4.

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 Price Elasticity of Demand
If the price falls from
$10 to $0, the quantity
demanded increases
from 30 to 50 pizzas
an hour.
The average price is
$5 and the average
quantity is 40 pizzas.
The price elasticity is
(20/40)/(10/5), which
equals 1/4.

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 Price Elasticity of Demand
If the price falls from
$15 to $10, the
quantity demanded
increases from 20 to
30 pizzas an hour.
The average price is
$12.50 and the
average quantity is 25
pizzas.
The price elasticity is
(10/25)/(5/12.5), which
equals 1.

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 Elasticity Along a straight-
Line Demand Curve
1. The price falls from 25 to 15 , the quantity
increased from zero to 20 Elasticity = 4
2. The price falls from 15 to 10 , the quantity
increased from 20 to 30 Elasticity = 1
3. The price falls from 10 to zero , the quantity
increased from 40 to 50 Elasticity = ¼
Note: we use average price & average quantity in
each case to calculate elasticity.

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 Elasticity Along a straight-
Line Demand Curve
Elasticity decreases as the price falls and quantity
demanded increases.
At midpoint of a demand curve , the demand is unit
elastic.
Above the midpoint of a demand curve , the demand
is elastic.
Below the midpoint of a demand curve , the demand
is inelastic.

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 Price Elasticity of Demand
Total Revenue and Elasticity
The total revenue from the sale of good or
service equals the price of the good multiplied by
the quantity sold.
When the price changes, total revenue also
changes.
But a rise in price doesn’t always increase total
revenue.

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 Price Elasticity of Demand
The change in total revenue due to a change in
price depends on the elasticity of demand:
 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 inelastic, a 1 percent price cut
decreases the quantity sold by more than 1 percent,
and total revenues decreases.
 If demand is unit elastic, a 1 percent price cut
increases the quantity sold by 1 percent, and total
revenue remains unchanged.

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 Price Elasticity of Demand
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 price change
(when all other influences on the quantity sold
remain the same).
 If a price cut increases total revenue, demand is
elastic.
 If a price cut decreases total revenue, demand is
inelastic.
 If a price cut leaves total revenue unchanged,
demand is unit elastic.

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 Price Elasticity of Demand
Figure 4.5 shows the
relationship between
elasticity of demand
and the total revenue.
As the price falls from
$25 to $12.50, the
quantity demanded
increases from 0 to 25
pizzas.
Demand is elastic,
and total revenue
increases.

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 Price Elasticity of Demand

In part (b), as the

quantity increases from
0 to 25 pizzas, demand
is elastic, and total
revenue increases.

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 Price Elasticity of Demand
At $12.50, demand is
unit elastic and total
revenue stops
increasing.

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 Price Elasticity of Demand

At 25, demand is unit

elastic, and total revenue
is at its maximum.

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 Price Elasticity of Demand

As the price falls

from $12.50 to zero,
the quantity
demanded increases
from 25 to 50 pizzas.

Demand is inelastic,
and total revenue
decreases.

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 Price Elasticity of Demand

As the quantity
increases from 25 to
50 pizzas, demand is
inelastic, and total
revenue decreases.

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 Price Elasticity of Demand
Your Expenditure and Your Elasticity
 If your demand is elastic, a 1 percent price cut
increases the quantity you buy by more than 1
percent and your expenditure on the item
increases.
 If your demand is inelastic, a 1 percent price cut
increases the quantity you buy by less than 1
percent and your expenditure on the item
decreases.
 If your demand is unit elastic, a 1 percent price cut
increases the quantity you buy by 1 percent and
your expenditure on the item does not change.
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 Price Elasticity of Demand
The Factors That Influence the Elasticity of
Demand
The elasticity of demand for a good depends
on:
The closeness of substitutes
The proportion of income spent on the good
The time elapsed since a price change

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 Price Elasticity of Demand
Closeness of Substitutes
The closer the substitutes for a good or service,
the more elastic are the demand for it.
Necessities, such as food or housing, generally
have inelastic demand.
Luxuries, such as exotic vacations, generally
have elastic demand.

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 Price Elasticity of Demand
Proportion of Income Spent on the Good
The greater the proportion of income consumers
spent on a good, the larger is its elasticity of
demand.
Time Elapsed Since Price Change
The more time consumers have to adjust to a
price change, or the longer that a good can be
stored without losing its value, the more elastic is
the demand for that good.

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 More Elasticities of Demand
Cross Elasticity of Demand
The cross elasticity of demand is a measure of
the responsiveness of demand for a good to a
change in the price of a substitute or a
complement, other things remaining the same.
cross elasticity is=

Percentage change in quantity demanded

Percentage change in price of substitute or
complement

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 Cross Elasticity of Demand

Cross elasticity of Percentage change

demand = in quantity
demanded

Percentage change
in price of a
substitute or
complement

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 More Elasticities of Demand
The cross elasticity of demand for
 a substitute is positive.
 a complement is negative.

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 More Elasticities of Demand
Figure 4.6 shows the
increase in the quantity
of pizza demanded when
the price of burger (a
substitute for pizza) rises.

The figure also shows the

decrease in the quantity of
pizza demanded when the
price of a soft drink (a
complement of pizza)
rises.
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 More Elasticities of Demand
Income Elasticity of Demand
The income elasticity of demand measures how
the quantity demanded of a good responds to a
change in income, other things remaining the
same.
the income elasticity of demand =

Percentage change in quantity demanded

Percentage change in income

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 Income Elasticity of Demand
The income elasticity of demand, is a measure of the
responsiveness of the demand for a good or service
to a change in income, other things remaining the
same.

Income elasticity of Percentage change

demand in quantity
= demanded
Percentage change
in income

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 More Elasticities of Demand
If the income elasticity of demand is greater than 1,
demand is income elastic and the good is a normal
good.
If the income elasticity of demand is greater than zero
but less than 1, demand is income inelastic and the
good is a normal good.
If the income elasticity of demand is less than zero
(negative) the good is an inferior good.

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 More Elasticities of Demand

In Figure 4.7(a), an
increase in demand
brings
 A large rise in price
 A small increase in
the quantity supplied

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 More Elasticities of Demand

In Figure 4.7(b), an
increase in demand
brings
 A small rise in
price
 A large increase in
the quantity
supplied

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