Elasticities

• Price Elasticity – What happens when price

goes up and down to demand in a product?
• Income Elasticity – What happens when
somebody’s income goes up and down to a
product?
• Cross Elasticity – What happens when a
substitute or complementary good goes up
and down to demand in your product?
Price Elasticity
What couldn’t you live without?
 Price Elasticity
Price

You will pay

anything to
drink….Which is
why Governments
control water
supplies…Price
Quantity inelastic!
 Price Elasticity
Price

If the price of a
cup of coffee goes
up too much you
will not get it… You
make a cup at
home. This is Price
Quantity elastic.
 Price Elasticity
Price

People are prepared

to pay approximately
£200 more than a
standard tablet for an
iPad. So the price is
inelastic.
Quantity
 Calculating Price Elasticity

Price Elasticity % Change in Quantity Demande

of Demand =
% Change in Price

• Price is elastic if the answer is more than 1

• Inelastic if less than 1.
• Ignore any – signs in the final answer.
 Example Problem…

Yesterday, the price of envelopes was £3 a box,

and Julie was willing to buy 10 boxes. Today, the
price has gone up to £3.75 a box, and Julie is now
willing to buy 8 boxes. Is Julie's demand for
envelopes elastic or inelastic? What is Julie's
elasticity of demand?
 Solution
1. % Change in Quantity = (8 - 10)/(10) = -0.20 =
-20%
2. % Change in Price = (3.75 - 3.00)/(3.00) =
0.25 = 25%
3. Elasticity = (-20%)/(25%) = -0.8 = 0.8

Price inelastic
Income Elasticity
What Happens if my wages go up?
 Income Elasticity

Income Elasticity % Change in Quantity Demanded

of Demand = % Change in Income
Cross Elasticity
Complementary Goods
Perfect Complements
Perfect complements
Must be bought E.g. Pencil and eraser

Base good and complementary good

E.G. The base good is a printer and the
complementary good is the cartridges

Why would you price the base good low

or high?
Substitute Goods
 Cross Elasticity

Cross Elasticity = % Change in Quantity Demanded

% Change in Price of one of its
substitutes or complements

Positive = substitute goods

Negative = complementary