Economics - Session 4

Elasticity - Elasticity is the responsiveness of demand for change in price. It is calculated by dividing %change in demand by %change in price.

Price elasticity of demand =% change in Qd / % change in P

In a demand curve, P and Q move in the opposite direction which makes price elasticity negative.
Although elasticity value is negative, we take the absolute value of elasticity and represent it by MOD(e) = e

Determinants of Price Elasticity

1. Price elasticity is higher, when close substitutes are
   available
2. Price elasticity is higher for narrowly defined goods than
   broadly defined ones.
3. Price elasticity is higher for luxuries, than for necessities.
4. Price elasticity is higher in the long run, than in the short run

Rule of thumb

Flatter the demand curve, bigger the elasticity Steeper the curve, smaller the elasticity

Variety of Demand curves

Inelastic Demand

1. Quantity demanded does not respond strongly to price changes.
2. Price elasticity of demand is less than 1

Elastic Demand

1. Quantity demanded responds strongly to changes in price
2. Price elasticity of demand is greater than one.

Perfectly Inelastic

1. Quantity demanded does not respond to price changes
2. Price leasticity of demand is zero

Perfectly Elastic

1. Quantity demanded changes infinitely with any change in price
2. Price elasticity of demand is infinite

Unit Elastic

1. Quantity demanded changes by the same percentage as the price
2. Price elasticity of demand is less than one

Furthur reading : Chapter 5 - Principles of Economics by MANKIW