© VAN SCHAIK PUBLISHERS
Chapter 6:
Elasticity
Learning Outcomes
Once you have studied this chapter you should be able to
• define elasticity
• explain the meaning and significance of price elasticity of demand
• distinguish between five categories of price elasticity of demand
• explain the determinants of price elasticity of demand
• define income elasticity and cross elasticity of demand
• explain the meaning and significance of price elasticity of supply
© VAN SCHAIK PUBLISHERS
Introduction
© VAN SCHAIK PUBLISHERS
A general definition of elasticity
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Figure 6-1 The impact of different demand elasticities on the
equilibrium price and quantity (Textbook page 105)
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Figure 6-1 The impact of different demand
elasticities on the equilibrium price
and quantity continued
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
• Calculating price elasticity of demand
Box 6-1 calculating arc elasticity (Textbook page 107)
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
• Price elasticity of demand and total revenue (or total
expenditure)
– A numerical example
Table 6-1 The demand for cappuccinos and total revenue from
cappuccino sales (Textbook page 109)
Figure 6-2 The relationship between price elasticity of demand and
total revenue (Textbook page 109)
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
• Different categories of price elasticity of demand
– Perfectly inelastic demand
– Inelastic demand
Box 6-3 Elasticity and slope (Textbook page 114)
– Unitarily elastic demand (unitary elasticity)
– Elastic demand
– Perfectly elastic demand
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Different categories of price elasticity of demand
Figure 6-3 The different categories of price elasticity of demand
(Textbook page 111)
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Different categories of price elasticity of demand
Figure 6-3 The different categories of price elasticity of demand continued
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Different categories of price elasticity of demand
Figure 6-3 The different categories of price elasticity of demand continued
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Different categories of price elasticity of demand
Figure 6-3 The different categories of price elasticity of demand continued
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Different categories of price elasticity of demand
Figure 6-3 The different categories of price elasticity of demand continued
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
Different categories of price elasticity of demand
Table 6-2 Price elasticity of demand: a summary
(Textbook page 112)
Box 6-2 Price elasticity of demand, price changes and changes in
total revenue (Textbook page 113)
© VAN SCHAIK PUBLISHERS
The price elasticity of demand
• Determinants of the price elasticity of demand
– Substitution possibilities
– The degree of complementarity of the product
– The type of want satisfied by the product
– The time period under consideration
– The proportion of income spent on the product
– Other possible determinants of price elasticity of
demand
* The definition of the product
* Advertising
* Durability
* Number of uses of the product
* Addiction
– The combined effect of the determinants
• Applications © VAN SCHAIK PUBLISHERS
Other demand elasticities
• Income elasticity of demand
Table 6-3 Some estimated income elasticities of demand in South
Africa, 1985 (Textbook page 116)
• Cross elasticity of demand
© VAN SCHAIK PUBLISHERS
The price elasticity of supply
• Different categories of supply elasticity
• The determinants of the price elasticity of supply
© VAN SCHAIK PUBLISHERS
The price elasticity of supply
The determinants of the price elasticity of supply
Figure 6-4 Different categories of price elasticity of supply
(Textbook page 118)
© VAN SCHAIK PUBLISHERS
The price elasticity of supply
The determinants of the price elasticity of supply
Figure 6-4 Different categories of price elasticity of supply continued
© VAN SCHAIK PUBLISHERS
The price elasticity of supply
The determinants of the price elasticity of supply
Figure 6-4 Different categories of price elasticity of supply continued
© VAN SCHAIK PUBLISHERS
The price elasticity of supply
The determinants of the price elasticity of supply
Figure 6-4 Different categories of price elasticity of supply continued
© VAN SCHAIK PUBLISHERS
The price elasticity of supply
The determinants of the price elasticity of supply
Figure 6-4 Different categories of price elasticity of supply continued
© VAN SCHAIK PUBLISHERS
Elasticity: a summary
Table 6-4 Different elasticities: a summary (Textbook page 119)
© VAN SCHAIK PUBLISHERS
Important concepts
• Elasticity • Slope and inverse of slope
• Price elasticity of demand • Determinants of price
• Elasticity coefficient elasticity
• Arc elasticity • Income elasticity of demand
• Total revenue (or expenditure) • Normal and inferior goods
• Perfectly inelastic demand • Essential and luxury goods
• Inelastic demand • Cross elasticity of demand
• Unitarily elastic demand • Price elasticity of supply
• Elastic demand • Elastic and inelastic supply
• Perfectly elastic demand
© VAN SCHAIK PUBLISHERS
