**Elasticity**

Inelastic Demand

24

21

18

15

9

12

6

20

24

**Market**

**P × Q = $45**

(Revenue)

(Revenue)

20

24

Market

Percentage (%) change:

End value - Start value

Midpoint

* 100%

A

B

% change in P =

2 - 4

3

* 100%

= 67%

% change in Q =

18 - 12

15

* 100%

= 40%

Price elasticity of demand =

40%

67%

= 0.6

What determines price elasticity?

-Price elasticity is higher when close

substitutes

are available.

-Price elasticity is higher for

narrowly defined goods

than broadly defined ones.

-Price elasticity is higher for

luxuries

than for

necessities.

-Price elasticity is higher in the

long run

than the

short run

.

Perfectly Inelastic Demand

P

Q

D

Q1

P2

P1

Q

Q1

P2

P1

P

Demand Curve:

Vertical

Elasticity:

0

Sensitivity:

None

Q2

Demand Curve:

relatively steep

Elasticity:

<1

Sensitivity:

relatively low

Unit Elastic Demand

Q

Q1

P2

P1

P

Q2

Demand Curve:

intermediate slope

Elasticity:

1

Sensitivity:

intermediate

Elastic Demand

Q

Q1

P2

P1

P

Q2

Demand Curve:

relatively flat

Elasticity:

>1

Sensitivity:

relatively high

Perfectly Elastic Demand

Q

Q1

P1

P

Q2

Demand Curve:

horizontal

Elasticity:

infinity

Sensitivity:

extreme

Example:

20

30

0

0

67

0.11

1

20

30

200

29

22

40

40

22

29

67

200

2.31

9.09

0.43

{

{

Elastic

Inelastic

Unit Elastic

% change in P =

2 - 4

3

* 100%

= 67%

% change in Q =

10 - 20

15

* 100%

Price elasticity of Supply =

67%

67%

= 1

B

A

= 67%

Perfectly Inelastic Supply

P

Q

S

Q1

P2

P1

Supply Curve:

Vertical

Elasticity:

0

Sensitivity:

None

Inelastic Supply

Q

Q1

P2

P1

P

Q2

Supply Curve:

relatively steep

Elasticity:

<1

Sensitivity:

relatively low

Unit Elastic Supply

Q

Q1

P2

P1

P

Q2

Supply Curve:

intermediate slope

Elasticity:

1

Sensitivity:

intermediate

Elastic Supply

Q

Q1

P2

P1

P

Q2

Supply Curve:

relatively flat

Elasticity:

>1

Sensitivity:

relatively high

Perfectly Elastic Supply

Q

Q1

P1

P

Q2

Supply Curve:

horizontal

Elasticity:

infinity

Sensitivity:

extreme

S

S

S

S

D

D

D

D

What determines price elasticity?

The

more easily sellers can change the quantity they produce

, the greater the price elasticity of supply.

For many goods, price elasticity of supply is greater in the

long run

than in the

short run

, because firms can build new factories, or new firms may be able to enter the market.

How the Price Elasticity of Supply Can Vary?

{

{

Elastic

Inelastic