Prepared by:
Fernando & Yvonn Quijano
© 2007 Worth Publishers Essentials of Economics Krugman • Wells • Olney
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Gassing up: A hard habit to break.
What you will learn in
this chapter:
➤ The definition of elasticity, a measure of
responsiveness to changes in prices or
incomes
➤ The importance of the price elasticity of
demand, which measures the
responsiveness of the quantity
demanded to price
➤ The meaning and importance of the
income elasticity of demand, a
measure of the responsiveness of
demand to income
➤ The significance of the price elasticity
of supply, which measures the
responsiveness of the quantity supplied
to price
➤ What factors influence the size of these
various elasticities
➤ How elasticity affects the incidence of a
tax, the measure of who bears its
burden
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Defining and Measuring Elasticity
The Price Elasticity of Demand
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Defining and Measuring Elasticity
The Price Elasticity of Demand
(5-1)
% change in quantity demanded 
(5-2)
% change in price 
(5-3)
Price elasticity of demand 
Change in quantity demanded
x 100
Initial quantity demanded
Change in price
x 100
Initial price
% change in quantity demanded
%change in price
The price elasticity of demand is the ratio of
the percent change in the quantity demanded
to the percent change in the price as we move
along the demand curve.
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Defining and Measuring Elasticity
Using the Midpoint Method to Calculate Elasticities
The midpoint method is a technique for
calculating the percent change. In this
approach, we calculate changes in a variable
compared with the average, or midpoint, of
the starting and final values.
(5-4) % change in X 
(5-5)
Change in X
x 100
Average value of X
Q2 - Q1
(Q1  Q2 ) / 2
Price elasticity of demand 
P2 - P1
( P1  P2 ) / 2
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economics in action
Estimating Elasticities
TABLE 5-1
Some Estimated Price
Elasticities of Demand
Good
Price elasticity
of demand
Inelastic demand
Eggs
Beef
Stationery
Gasoline
Elastic demand
Housing
Restaurant meals
Airline travel
Foreign travel
0.1
0.4
0.5
0.5
1.2
2.3
2.4
4.1
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Interpreting the Price Elasticity of Demand
How Elastic Is Elastic?
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Interpreting the Price Elasticity of Demand
How Elastic Is Elastic?
Demand is perfectly inelastic when the quantity
demanded does not respond at all to changes in
the price. When demand is perfectly inelastic, the
demand curve is a vertical line.
Demand is perfectly elastic when any price
increase will cause the quantity demanded to drop
to zero. When demand is perfectly elastic, the
demand curve is a horizontal line.
Demand is elastic if the price elasticity of demand
is greater than 1, inelastic if the price elasticity of
demand is less than 1, and unit-elastic if the price
elasticity of demand is exactly 1.
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Interpreting the Price Elasticity of Demand
How Elastic Is Elastic?
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Interpreting the Price Elasticity of Demand
What Factors Determine the Price Elasticity of
Demand?
Whether Close Substitutes Are Available
Whether the Good Is a Necessity or a Luxury
Time
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Elasticity and Total Revenue
The total revenue is the total value of sales of a
good or service. It is equal to the price multiplied
by the quantity sold.
(5-6)
Total revenue  Price  quantity sold
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Interpreting the Price Elasticity of Demand
What Factors Determine the Price Elasticity of
Demand?
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Elasticity and Total Revenue
TABLE 5-2
Price Elasticity of Demand and Total Revenue
Price of Price of
crossing crossing
= $0.90
= $1.10
Unit-elastic demand (price elasticity of demand = 1)
Quantity demanded
1,100
Total revenue
$990
Inelastic demand (price elasticity of demand = 0.5)
Quantity demanded
1,050
Total revenue
$945
Elastic demand (price elasticity of demand = 2)
Quantity demanded
Total revenue
1,200
$1,080
Effect
of price
increase
Effect
of price
decrease
900
$990
Total revenue
unchanged
Total revenue
unchanged
950
$1,045
Total revenue
increases
Total revenue
decreases
800
$880
Total revenue
increases
Total revenue
decreases
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Other Demand Elasticities
The Cross-Price Elasticity of Demand
The cross-price elasticity of demand between
two goods measures the effect of the change in
one good’s price on the quantity demanded of the
other good. It is equal to the percent change in the
quantity demanded of one good divided by the
percent change in the other good’s price.
(5-7)
Cross - price elasticity of demand between goods A and B

% change in quantity of A demanded
% change in price of B
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Other Demand Elasticities
The Income Elasticity of Demand
The income elasticity of demand is the percent
change in the quantity of a good demanded when
a consumer’s income changes divided by the
percent change in the consumer’s income.
(5-8)
Income elasticity of demand 
% change in quantity demanded
% change in income
The demand for a good is income-elastic if the
income elasticity of demand for that good is
greater than 1.
The demand for a good is income-inelastic if the
income elasticity of demand for that good is
positive but less than 1.
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The Price Elasticity of Supply
Measuring the Price Elasticity of Supply
The price elasticity of supply is a measure of the
responsiveness of the quantity of a good supplied
to the price of that good. It is the ratio of the
percent change in the quantity supplied to the
percent change in the price as we move along the
supply curve.
(5-9)
Price elasticity of supply 
% change in quantity supplied
% change in price
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The Price Elasticity of Supply
Measuring the Price Elasticity of Supply
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The Price Elasticity of Supply
Measuring the Price Elasticity of Supply
There is perfectly inelastic supply when the
price elasticity of supply is zero, so that changes in
the price of the good have no effect on the
quantity supplied. A perfectly inelastic supply curve
is a vertical line.
There is perfectly elastic supply when even a
tiny increase or reduction in the price will lead to
very large changes in the quantity supplied, so
that the price elasticity of supply is infinite. A
perfectly elastic supply curve is a horizontal line.
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The Price Elasticity of Supply
What Factors Determine the Price Elasticity of
Supply?
The Availability of Inputs
Time
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An Elasticity Menagerie
TABLE 5-3
An Elasticity Menagerie
Name
Possible values
Price elasticity of demand 
Significance
% change in quantity demanded
(use absolute value)
% change in price
Perfectly inelastic demand
0
Price has no effect on quantity demanded (vertical
demand curve).
Inelastic demand
Between 0 and 1
A rise in price increases total revenue.
Unit-elastic demand
Exactly 1
Changes in price have no effect on total revenue.
Elastic demand
Greater than 1,
less than ∞
A rise in price reduces total revenue.
Perfectly elastic demand
∞
A rise in price causes quantity demanded to fall to 0.
A fall in price leads to an infinite quantity demanded
(horizontal demand curve).
Cross - price elasticity of demand 
% change in quantity of one good demanded
% change in price of another good
Complements
Negative
Quantity demanded of one good falls when
the price of another rises.
Substitutes
Positive
Quantity demanded of one good rises when
the price of another rises.
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An Elasticity Menagerie
TABLE 5-3 cont’d.
An Elasticity Menagerie
Name
Possible values
Income elasticity of demand 
Inferior good
Significance
% change in quantity demanded
% change in income
Negative
Quantity demanded falls when income rises.
Normal good, income-inelastic Positive,
less than 1
Quantity demanded rises when income rises,
but not as rapidly as income.
Normal good, income-elastic
Quantity demanded rises when income rises,
and more rapidly than income.
Greater than 1
Price elasticity of supply 
Perfectly inelastic supply
Perfectly elastic supply
% change in quantity supplied
% change in price
0
Price has no effect on quantity supplied (vertical
supply curve).
Greater than 0,
less than ∞
Ordinary upward-sloping supply curve.
∞
Any fall in price causes quantity supplied to fall to 0.
Any rise in price elicits an infinite quantity supplied
(horizontal supply curve).
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Using Elasticity: The Incidence of an Excise Tax
When an Excise Tax Is Paid Mainly by
Consumers
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Using Elasticity: The Incidence of an Excise Tax
When an Excise Tax Is Paid Mainly by
Producers
© 2007 Worth Publishers Essentials of Economics Krugman • Wells • Olney
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KEY TERMS
Price elasticity of demand
Cross-price elasticity of demand
Midpoint method
Income elasticity of demand
Perfectly inelastic demand
Income-elastic demand
Perfectly elastic demand
Income-inelastic demand
Elastic demand
Price elasticity of supply
Inelastic demand
Perfectly inelastic supply
Unit-elastic demand
Perfectly elastic supply
Total revenue
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