Microeconomics · StudentHub Lesson
Elasticity
Measuring how responsive quantity demanded or supplied is to changes in price.
What you will learn
- Define price elasticity of demand and supply
- Calculate elasticity using the percentage change formula
- Classify goods as elastic, inelastic, or unit elastic
- Identify determinants of elasticity (substitutes, necessity, time)
- Explain how elasticity affects total revenue
Watch the lesson
Marginal Analysis, Roller Coasters, Elasticity, and Van Gogh: Crash Course Economics #18 · CrashCourse
Watch on YouTubeTopic notes
Main Idea
Elasticity measures how much quantity demanded (or supplied) changes when price changes. It tells us whether consumers are very sensitive to price changes or not.
Key Concepts
- Price elasticity of demand (PED) = % change in quantity demanded / % change in price
- Elastic (PED > 1): quantity is very responsive to price (e.g., luxury goods)
- Inelastic (PED < 1): quantity barely responds to price (e.g., necessities like insulin)
- Unit elastic (PED = 1): proportional response
- Determinants: availability of substitutes, necessity vs. luxury, proportion of income spent, time horizon
Formula
PED = (% change in quantity demanded) / (% change in price)
Diagram (described)
A steep, near-vertical demand curve represents inelastic demand (quantity barely changes). A flat, near-horizontal demand curve represents elastic demand (quantity changes a lot).
Total Revenue Link
- If demand is elastic, raising price decreases total revenue
- If demand is inelastic, raising price increases total revenue
Example
If price rises 10% and quantity demanded falls 20%, PED = -20%/10% = -2 (elastic, ignoring sign).
Common Mistakes
- Forgetting elasticity is usually expressed as an absolute value
- Confusing elastic (flat curve) with inelastic (steep curve)
- Assuming all goods have the same elasticity regardless of time frame
Key concepts
Important terms
- Price elasticity of demand
- A measure of how much quantity demanded changes in response to a price change.
- Elastic demand
- Demand where quantity changes proportionally more than price (PED > 1).
- Inelastic demand
- Demand where quantity changes proportionally less than price (PED < 1).
- Total revenue
- Price multiplied by quantity sold.
Worked examples
Problem
Price of a good rises from $10 to $11 (10% increase) and quantity demanded falls from 100 to 85 (15% decrease). Find PED and classify it.
- 1. PED = % change in quantity / % change in price
- 2. PED = -15% / 10% = -1.5
- 3. Take absolute value: 1.5 > 1
Answer: PED = 1.5, demand is elastic
Problem
If demand is inelastic, what happens to total revenue when a firm raises price?
- 1. Inelastic means quantity falls less than proportionally
- 2. Revenue = price x quantity
- 3. Since price rises more than quantity falls, revenue increases
Answer: Total revenue increases
Quick revision
- PED = %change in quantity demanded / %change in price
- PED > 1 is elastic; PED < 1 is inelastic
- Necessities tend to be inelastic; luxuries tend to be elastic
- More substitutes = more elastic demand
- Elastic demand: price up -> revenue down
- Inelastic demand: price up -> revenue up
- Longer time horizons tend to make demand more elastic
Check your understanding
Question 1 · Multiple choice
If a small price increase causes a large drop in quantity demanded, demand is:
Question 2 · Multiple choice
Which good is most likely to have inelastic demand?
Question 3 · True or false
If demand is elastic, raising the price will increase total revenue.
Question 4 · Short answer
Name two factors that make demand for a good more elastic.
Question 5 · Multiple choice
Price elasticity of demand is calculated as:
Done with Elasticity?
Sign in to save your progress across the library.