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O
Quantity
Perfectly Inelastic Demand
We say that demand
is perfectly inelastic
when a 1% change in Price
O
Quantity
Price Elasticity of Supply
When the price of
oil increases by 1%
the quantity S1
supplied increases Price
by 0.2%, so the elasticity of
quantity supplied S2
supply is 0.2.
of oil is less
sensitive to the
price [S1].
when a 1% change in
the price would result
in no change in Perfectly
quantity supplied. Inelastic
Supply
(elasticity = 0)
Quantity
contd
Milk and Ice Cream
It doesnt matter that milk is sold by the
gallon and ice cream is sold by the pint .
We compare the demand elasticities of -0.2
(milk) and -2.6 (ice cream).
Ice cream demand is more price sensitive.
Oil and Beef
It doesnt matter that oil is sold by barrels
while beef is sold by the ounce
We compare the supply elasticities of 0.2 (oil)
and 5 (beef).
Beef supply is more price sensitive.
Size of Price Elasticities
Unit elastic
Inelastic Elastic
0 1 2 3 4 5 6
1) Point Method
2) Arc Method
3) Total Expenditure Method
4) Percentage/Proportionate Method
5) Revenue Method
Point Formula for Own P.E.O.D
The exact formula for calculating an elasticity at
the point A on the demand curve.
Note: well take absolute value
P A
X D
elasticity A
P
atA
X
MB Lower segment of DC
E at point M
MA Upper Segment of DC
Slope of the Demand Curve
Price
P is the change in
price. (P<0)
ADemand
P
slope
X
X is the change in P M
quantity. P+ P
P
M
X
slope = P/ X
1/slope = X/P B
X X + X Quantity
ARC METHOD FORMULA
When elasticity is computed between two separate
points on a curve.
OriginalQ NewQ
originalQ NewQ
E
OriginalP NewP
OriginalP NewP
Q1 - Q2 P1 P2
E
Q1 Q2 P1 P2
Using Demand Elasticity: Total
Expenditures
% change in the Dx
Ey
% change in the Y
Qx Y Qx Y
Ey
Qx Y Y Qx
contd
There are 3 main types
Positive Income Elasticity
Egs. Normal goods
Unit Income Elasticity
Elastic Income Elasticity
Inelastic Income Elasticity
Negative Income Elasticity
Egs. Inferior/Giffen goods
Zero Income Elasticity
Egs. Salt, postcard, newspaper, candles,
buttons etc