ECON107
Principles of
Microeconomics
Week 7
OCTOBER 2013
Chapter-4
1
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Dr. Mazharul Islam
4
7w/10/2013
Elasticity
Dr. Mazharul Islam
3
Lesson Objectives
 Define
elasticity
 Define and calculate the price
elasticity of demand.
 Define and explain the elastic,
inelastic, unit-elastic, perfect elastic
and perfect inelastic demand.
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Dr. Mazharul Islam
4
Price Elasticity of Demand
 In
economics,
elasticity
is
the
measurement of how changing one
economic variable affects others.
 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
buying plans remain the same. In simplest
terms, the price elasticity of demand
measures the percent change in quantity
demanded divided by the percent
change in price.
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Dr. Mazharul Islam
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Price Elasticity of Demand
Price elasticity of demand 
Percentage change in quantity demanded
Percentage change in price
Qd
Qd  Qd
%Qd
Qave
(Qd  Qd ) / 2



D %P
P
P  P
( P  P) / 2
Pave
E
Here, P = initial price, Qd = initial quantity,
P’ = new price, Q’d = new quantity,  = change
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Dr. Mazharul Islam
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Point elasticity:
It measured elasticity at
a given point of a demand (or a supply)
curve. The point elasticity of a linear
demand function can be expressed as:
Q P1
p 

P Q1
7
Price Elasticity of Demand
Because
the law of demand states that
price and quantity demanded are
inversely related, the change in price
and the change in quantity demanded
have opposite signs  the price
elasticity of demand has a negative
sign.
But it is absolute value, that reveals
how responsive the quantity change
has been to a price change.
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Dr. Mazharul Islam
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Price Elasticity of Demand
The price elasticity of demand can be
divided into three general categories
depending on how responsive quantity
demanded is to a change in price.
If
the percent change in quantity
demanded is smaller than the percent
change in price, the resulting price
elasticity has an absolute value
between 0 and 1.0  demand is
inelastic.
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Dr. Mazharul Islam
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Price Elasticity of Demand
$1.10
b
Price per taco
0.90
a
D
0 Thousands per day 95 105
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Price Elasticity of Demand
the percent change in quantity
demanded just equals the percent
change in price  a price elasticity
with an absolute value of 1.0  unitelastic demand.
Price per unit
If
E D=
$10
a
b
6
0
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1
D"
60
100
Quantity
per period
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Price Elasticity of Demand
If
the percent change in quantity
demanded exceeds the percent
change in price, the resulting price
elasticity has an absolute value
exceeding 1.0  demand is said to
be elastic
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Dr. Mazharul Islam
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Price Elasticity of Demand
$1.10
a
b
Price per taco
0.90
0
D
65
105
Thousands per day
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Dr. Mazharul Islam
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Price Elasticity of Demand
If
no change in quantity demanded
with the change in price  a price
elasticity with an absolute value of
0.0  perfectly inelastic demand.
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Dr. Mazharul Islam
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Price Elasticity of Demand
If
the percentage change in the
quantity demanded is infinitely large
when the price barely changes  a
price elasticity with an absolute
value of   perfectly elastic
demand.
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Dr. Mazharul Islam
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Price Elasticity of Demand
Elasticity
Curve
Along a Linear Demand
Along a linear demand curve, demand is:
Unit
elastic at the midpoint of the curve.
Elastic
above the midpoint of the curve.
Inelastic
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below the midpoint of the curve.
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Price Elasticity of Demand
Elasticity
Curve
Along
a
Linear
Demand
Figure shows that the
elasticity decreases along
a linear demand curve as
the price falls.
1. At any price above the midpoint,
demand is elastic.
2. At the midpoint, demand is unit
elastic.
3. At any price below the midpoint,
demand is inelastic.
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Now it’s over for today. Do you
have any question?
5w/9/2013
Dr. Mazharul Islam