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ECON 1005 Principles of Economics I: Microeconomics Semester 1, 2019/20
1
Elasticity
1. Elasticity
• It measures the sensitivity or responsiveness of one variable to another.
o E.g. the sensitivity of the quantity demanded to any particular demand determinant.
• In general, elasticity is the percentage change in one variable, say y, in response to a given
percentage change in another variable, say x, ceteris paribus.
xx
yy
x
y
E/
/
in change percentage
in change percentage
==
2. Price Elasticity of Demand
• It measures the sensitivity of the quantity demanded to the price of the good.
• The price elasticity of demand is the percentage change in quantity demanded in response to
a given percentage change in the price, ceteris paribus. That is,
%100
%100
in change percentage
in change percentage
,
==
p
p
Q
Q
p
Q
Ed
d
d
pD
o It is interpreted as the percentage change in quantity demanded when price changes by
one percent, ceteris paribus.
• The law of demand implies that ED,p < 0.
Example 1: Based on the above demand curve, when price drops from $8 to $6, the quantity
demanded increases from 140 to 180. The price elasticity of demand can be calculated:
14.1
%25
%57.28
%100
8
2
%100
140
40
,==
=
pD
E
Price
Quantity demanded
$10
100
$8
140
$6
180
$4
220
$2
260
p
Q
D
180
$8
$6
140
ECON 1005 Principles of Economics I: Microeconomics Semester 1, 2019/20
2
• What is the price elasticity of demand computed based on the price increase from $6 to $8.
o To obtain a consistent elasticity value, the midpoint formula is therefore used in
computing elasticity:
%100
%100
in change percentage
in change percentage
,
==
avg
d
avg
d
d
pD
p
p
Q
Q
p
Q
E
Example 2: Using the midpoint formula, the price elasticity of demand between $6 and $8 can be
calculated:
875.0
%57.28
%25
%100
7
2
%100
160
40
,==
=
pD
E
• In interpreting the price elasticity of demand, economists classified demand based on its
sensitivity to price:
Category
Elasticity Value
Perfectly elastic demand
ED,p = ∞
Elastic demand
∞ > ED,p > 1
Unit elastic demand
ED,p = 1
Inelastic demand
0 < ED,p < 1
Perfectly inelastic demand
ED,p = 0
3. Price Elasticity of Demand and the Shape of Demand Curve
• Along a straight-line (or linear) demand curve, demand becomes less elastic as we move
downward (or rightward).
• To understand this, we rewrite the formula of price elasticity of demand as follow:
d
ddd
pD Q
p
p
Q
pp
QQ
E
=
=/
/
,
p
Q
D
M
ED,p = 1
ED,p >1
ED,p < 1
ED,p =∞
ED,p =0
ECON 1005 Principles of Economics I: Microeconomics Semester 1, 2019/20
3
d
pD Q
p
E= Curve Demand of Slope
1
,
o Along a straight-line demand curve, the slope is constant. Therefore, moving down along
the demand curve (i.e. p drops and Qd rises), the demand becomes more inelastic (ED,p
decreases).
• It also implies that the price elasticity of demand between two demand curves can be
compared based on their shape (slope in particular) if they cross at the same point (point A).
• To understand this, recall that:
d
pD Q
p
E= Curve Demand of Slope
1
,
o Therefore, around point A, the flatter demand curve D2 (the slope of the demand curve is
smaller) is more elastic than the steeper demand curve D1.
• Two special cases:
4. Price Elasticity of Demand and Total Revenue
• How would the total revenue of all sellers (equivalently total expenditure of all buyers)
change when there is an increase in price?
p
Q
D1
Q1
p1
D2
p2
∆Q1
∆Q2
∆p
A
p
Q
D1
Q1
p1
D2
A
Perfectly elastic
demand curve
Perfectly inelastic
demand curve
ECON 1005 Principles of Economics I: Microeconomics Semester 1, 2019/20
• Total Revenue (TR) is defined as:
QpTR =
• Given a price increase,
o If the demand is price elastic, ED,p > 1, total revenue will decrease.
o If the demand is price inelastic, ED,p < 1, total revenue will increase.
o If the demand is unit elastic, ED,p = 1, total revenue will remain unchanged.
p
Q
D1
$9
D2
$11
A
