Econ 208
lecture 5
page 1
Lecture 5:
Demand and Supply
Elasticity
Elasticity is a general concept applied to measuring the
responsiveness of a variable to a change in another variable.
Thus,
we can speak of income elasticity – which is the responsiveness of
quantity demanded to a change in real income, price elasticity,
which is the response to a change in price; supply elasticity, which
is the responsiveness of quantity supplied to change in price and so
forth.
The definitions all involve the ratio of the percentage change in the
dependent variable to the percentage change in the independent
variable.
In the present case we are looking at
priceelasticity.
At the end of the last hour I was setting up a taxonomy of price
elasticioties:
1.
Perfect elasticity
e =  ∞, which is to say that a small
variation in price gives rise to an infinitely large response.
This is
graphed as a horizontal line.
Recall that price elasticity of demand
is always negative because demand curves slope downward.
2.
Elastic – in this case  ∞ < e <  1
3.
Unitary elastic
e = 1
4.
Inelastic: 1 < e < 0
5.
Perfectly inelastic e = 0, in which case the demand curve is
vertical. No responsiveness to price.
Elasticity and total revenue
The different elasticities have different implications for the change
in the value of sales with respect to change in price.
There are
three interesting cases:
elastic, unitary elastic, and inelastic.
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 Winter '08
 Kramer
 Biology, Supply And Demand

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