3.

Elasticities of
demand and
supply
Elasticity = A measure of the
responsiveness of quantity
demanded or supplied to
changes in the factors which
influence demand or supply
Qd= f(P, I, PR, A, N, T)
Qs = f(P, PC, PR, T, A, N, TS)
3.1. Elasticities of demand
3.1.1. Price elasticity of demand
3.1.2. Income elasticity of demand
3.1.3. Cross – elasticity of demand
3.1.1. Price elasticity of
demand
 PED = a measure of the responsiveness of quantity
demanded to changes in the price of a good,
other things being equal (constant);
 PED = The ratio of the percentage change in the
quantity demanded of a good to a given
percentage change in its price, other things being
equal.
 Revenue = the amount of money the seller gets
when he sells a good; it is calculated as price
times quantity sold: 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃 ∙ 𝑄𝑠𝑜𝑙𝑑
∆𝑄𝑑
%𝑄𝑑 𝑄 ∆𝑄𝑑 𝑃0
𝑃𝐸𝐷 = = 𝑑0 = ∙
%𝑃 ∆𝑃 ∆𝑃 𝑄𝑑0
𝑃0
PED - values Demand

PED = 0 Perfectly inelastic (vertical)

PED < 1 Inelastic

PED = 1 Unit elastic

PED > 1 Elastic

PED → ∞ Perfectly elastic (horizontal)

The factors of the elasticity of
demand
 The availability of substitutes (the more
substitutes we have for a good, the more
elastic is the demand for that good;
 The existence of complements (if something is
a minor complement to an important good,
its demand tends to be inelastic);
 The ratio of the expenditures for a good in the
total income of a person (the lower this ratio
is, the lower the elasticity of demand is);
 Time (demand is more elastic in the long run
than in the short run).
3.1.2. Income elasticity of demand
(IED)
 IED = a measure of the responsiveness of
quantity demanded to changes in the
consumer’s income, other things being equal
(constant);
 IED = The ratio of the percentage change in
the quantity demanded of a good to a given
percentage change in the consumer’s
income, other things being equal;
∆𝑄𝑑
%𝑄𝑑 𝑄𝑑0 ∆𝑄𝑑 𝐼0
𝐼𝐸𝐷 = = = ∙
%𝐼 ∆𝐼 ∆𝐼 𝑄𝑑0
𝐼0 IED - values Goods

IED < 0 Inferior

IED > 0 Normal

3.1.3. Cross – elasticity of demand
(CED)
 CED = a measure of the responsiveness of
quantity demanded for a good to changes in
the price of a related good, other things
being equal (constant);
 CED = the ratio of the percentage change in
the quantity demanded of a good to a given
percentage change in the price of a related
good, other things being equal;
∆𝑄𝑑𝑋
%𝑄𝑑𝑋 𝑄𝑑𝑋0 ∆𝑄𝑑𝑋 𝑃𝑌
𝐶𝐸𝐷 = = = ∙
%𝑃𝑌 ∆𝑃𝑌 ∆𝑃𝑌 𝑄𝑑𝑋0
𝑃𝑌0 CED - values Goods

CED < 0 Complementary

CED > 0 Substitute

3.2. Elasticity of supply: homework
(definition, price elasticity of
supply, graphs, factors)
THANK YOU!