Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Managerial Economics & Business
Strategy
Chapter 3
Quantitative
Demand Analysis
Elasticity
3-2
Overview
I. The Elasticity Concept
II. Price Elasticity of Demand
III. Elasticity and Total Revenue
IV. Factors Affecting the Price Elasticity of
Demand
V. Cross elasticity of Demand
VI. Income Elasticity of Demand
3-3
What is Elasticity?
▪The origin of Elasticity is physics!
▪It is about measuring the response of
material to pressure.
▪we need action to measure the reaction
▪So if Qdx=f(Px), then Px will be the action
and Qdxwill be the reaction
▪Elasticity is measuring the
response of Qdxto changes in Px
Px
Px
Qdx
3-4
How Many Elasticities for demand function
▪If Demand function is Qdx=f(Px, Py, M)
▪With three actions we can measure three E:
𝐸𝑄𝑑
𝑃Price Elasticity of demand
𝐸𝑄𝑑
𝐶Cross Elasticity of demand
𝐸𝑄𝑑
𝑀Income Elasticity of demand
Price Elasticity of Demand
▪There are 5 values of Elasticity
X
d
X
PQ P
Q
EXX
=%
%
,
1. Perfectly elastic: E = – ∞, % ∆Qd ≈ ∞
