Lecture Five: Elasticity
September 27, 2011
Introduction to Elasticity
If the demand curve is flat, the price is very elastic. If the demand curve is very
steep, the price is inelastic.
An elastic product would mean that a change in the price would bring on a large
change in the demand of the product.
An inelastic product would mean that a change in price would not affect the
amount demanded of the product.
Elastic goods are ones that have many substitutes, or are not necessities.
Inelastic goods are ones that do not have any substitutes, or are considered to
Price Elasticity of Demand
For a steep demand curve, an increase in supply would bring about a large fall in
the price and only a small increase in the quantity demanded.
For a flatter demand curve, the same increase in supply would bring a smaller fall
in the price with a large increase in the quantity demanded.
Total revenue = price x quantity (this is important to keep in mind when
determining whether to increase the supply of a given good.
The price elasticity of demand is a units-free 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.
The formula is : % change in the quantity demanded divided by the %
change in the price.
The numerator is the quantity and the denominator is the price,
To calculate the price elasticity of demand: We express the change in the price as a percentage of the average prices -
the average of the initial and new price.
We express the change in the quantity demanded as a percentage of the