4

ELASTICITY

Chapter Key Ideas

Predicting Prices
A. To predict the quantitative
effects of changes in demand
and supply on prices and
quantities, we need to know
how responsive demand and
supply are to price and other
influences on buying plans and
selling plans.
B. This chapter explains how we
measure the responsive
demand and supply to price
and other influences on buying
plans and selling plans using
the concept of elasticity. It
explains how we calculate,
interpret, and use elasticity.

Outline
I.

Price Elasticity of Demand

A. Figure 4.1 shows how the
demand curve influences the
price and quantity responses
that result from a given

change in supply. The figure highlights the need for a measure of

the responsiveness of the quantity demanded to a price change.
B. The price elasticity of demand is a units-free measure of the
responsiveness of the quantity demanded of a good to a change in
its price when all other influences on buyers plans remain the
same.

C. Calculating Elasticity
1. The price elasticity of demand is equal to
Percentage
change
in quantity
demanded
Percentage
change
in price

2. To calculate the price elasticity of demand, we express the change

in price as a percentage of the average pricethe midpoint
between the initial and new price.
3. Similarly we express the change in the quantity demanded as a
percentage of the average quantity demandedthe average of the
initial and new quantity.
4. Figure 4.2 shows what is
needed to calculate the price
elasticity of demand for
pizza: The percentage
change in quantity
demanded is %Q, and the
percentage change in price is
%P. We calculate %Q as

Q/Qave and we calculate

%P as P/Pave so we
calculate the price elasticity
of demand as (Q/Qave)/
(P/Pave).

a) By using the average

price and average
quantity, the elasticity is
the same value whether
the price rises or falls.
b) The ratio of two
proportionate changes is
the same as the ratio of
two percentage changes.
The measure is unitsfree because it is a ratio
of two percentage
changes and the
percentages cancel out.
Changing the units of
measurement of price or
quantity leave the value of the elasticity the same.
c) The demand elasticity formula yields a negative value, because
price and quantity move in opposite directions. However, it is
the magnitude, or absolute value, of the measure that reveals
how responsive the quantity change has been to a price change.
So we use the magnitude or the absolute value of the price
elasticity of demand.

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CHAPTER 4

D. Inelastic and Elastic Demand

Demand can be inelastic, unit elastic, or elastic, and can range from
zero to infinity.
1. If the quantity demanded doesnt change when the price changes,
the price elasticity of demand is zero and demand is perfectly
inelastic. The demand curve is vertical. Figure 4.3a illustrates this
case.
2. If the percentage change in the quantity demanded equals the
percentage change in price, the value of the price elasticity of
demand equals 1 and demand is unit elastic. Figure 4.3b
illustrates this casea demand curve with ever declining slope.
(Note that a unit elastic demand curve is not linear.)
3. Between the two previous cases, the percentage change in the
quantity demanded is smaller than the percentage change in price
so that the value of the price elasticity of demand is less than 1 and
demand is inelastic.
4. If the percentage change in the quantity demanded is infinitely
large when the price barely changes, the value of the price
elasticity of demand is infinite and demand is perfectly elastic.
The demand curve is horizontal. Figure 4.3c illustrates this case.
5. If the percentage change in the quantity demanded is greater than
the percentage change in price, the value of the price elasticity of
demand is greater than 1 and demand is elastic.

E. Elasticity Along a Straight-Line Demand Curve

1. While moving along a linear
demand curve, the demand
becomes less elastic as the
price falls. Figure 4.4
illustrates this fact.
2. Demand is unit elastic at
the mid-point of the
demand curve.
E. Total Revenue and Elasticity

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79

F.

1. The total revenue from the sale of good equals the price of the
good multiplied by the quantity sold.
2. The change in total revenue from a change in price depends upon
the elasticity of demand:
a) If demand is elastic, a 1 percent price cut increases the quantity
sold by more than 1 percent, and total revenue increases.
b) If demand is inelastic, a 1 percent price cut decreases the
quantity sold by more than 1 percent, and total revenue
decreases.
c) If demand is unitary elastic, a 1 percent price cut increases the
quantity sold by 1 percent, and total revenue remains
unchanged.
3. The total revenue test is a
method of estimating the
price elasticity of demand
by observing the change in
total revenue that results
from a price change (when
all other influences on the
quantity demanded remain
unchanged).
a) If a price cut increases
total revenue, then
demand is elastic.
b) If a price cut decreases
total revenue, then
demand is inelastic.
c) If a price cut leaves total
revenue unchanged,
then demand is unitary
elastic.
4. Figure 4.5 shows the
relationship between
elasticity of demand for
pizzas and the total
revenues from pizza sales
across the entire demand
curve for pizza.
The Factors That Influence
the Elasticity of Demand
The magnitude of the elasticity
of demand depends on three
factors:
1. The closeness of
substitutes:

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a) The closer the substitutes for a good or service, the more elastic
the demand for it.
b) Necessities, such as food or housing, generally have inelastic
demand.
c) Luxuries, such as exotic vacations, generally have elastic
demand.
2. The proportion of income spent on the good.
a) The greater the proportion of income consumers spend on a
good, the larger is the demand elasticity for that good.

ELASTICITY

81

b) Figure 4.6 shows the

proportion of income
spent on food in different
countries. This table
shows how the
magnitude of the price
elasticity of demand for
food rises as the fraction
of income spent on food
increases.
3. The time elapsed since a
price change.
a) The more time
consumers have to
adjust to a price change
the more elastic the
demand for that good.
II. More Elasticities of Demand
A. Cross Elasticity of Demand
1. The cross elasticity of demand is a measure of the
responsiveness of demand for a good to a change in the price of a
substitute or a compliment, other things remaining the same.
2. The formula for the cross elasticity of demand is:
Cross
elasticity
of demand

Percentage
change
in quantity
demanded
Percentage
change
in price
of asubstitute
orcomplem

a) The cross elasticity of

demand for a substitute is
positive. Figure 4.7 shows
the increase in the
quantity of pizza
demanded when the price
of hamburger (a substitute
for pizza) rises.
b) The cross elasticity of
demand for a complement
is negative. Figure 4.7
shows the decrease in the
quantity of pizza
demanded when the price
of a soft drink (a
complement of pizza) rises.
B. Income Elasticity of Demand
1. The income elasticity of demand measures the responsiveness
of the demand for a good or service to a change in income, other
things remaining the same.
2. The formula for the income elasticity of demand is:

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CHAPTER 4

Income
elasticity
of demand

Percentage
change
in quantity
demanded
.
Percentage
change
in income

a) If the income elasticity of demand is greater than 1, demand is

income elastic and the good is a normal good.
b) If the income elasticity of demand is positive but less than 1,
demand is income inelastic and the good is a normal good.
c) If the income elasticity
of demand is negative
the good is an inferior
good.
3. Table 4.2 shows estimates
of income elasticity of
demand for various goods
and services.

4. Figure 4.8 shows estimates of

the income elasticity for food
in different countries. In
countries with high average
incomes per person, the size
of the income elasticity of
demand for food is smaller.

ELASTICITY

83

III. Elasticity of Supply

A. Figure 4.9 shows how the supply
curve influences the price and
quantity responses that result
from a given change in demand
and highlights the need for a
measure of the responsiveness
of the quantity supplied to a
price change.
B. The elasticity of supply
measures the responsiveness of
the quantity supplied to a
change in the price of a good
when all other influences on
selling plans remain the same.

C. Calculating the Elasticity of Supply

1. The formula for the elasticity of supply is:
Elasticity
of supply

Percentage
change
in quantity
supplied
.
Percentage
change
in price

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CHAPTER 4

2. Figure 4.10 shows three cases of the elasticity of supply.

a) Supply is perfectly inelastic if the elasticity of supply equals 0. In

this case, as Figure 4.10a shows, the supply curve is vertical.
b) Supply is unit elastic if the elasticity of supply equals 1. In this
case, as Figure 4.10b shows, the supply curve is linear and
passes through the origin. The slope of the supply curve is
irrelevant.
c) Supply is perfectly elastic if the elasticity of supply is infinite. In
this case, as Figure 4.10c shows, the supply curve is horizontal.
D. The Factors That Influence the Elasticity of Supply
The elasticity of supply depends on
1. Resource substitution possibilities: The easier it is to substitute
among the resources used to produce a good or service, the greater
is its elasticity of supply.
2. The time frame for supply decisions: The more time that passes
after a price change, the greater is the elasticity of supply.

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85

E. Table 4.3 provides a glossary of the all elasticity measures.

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Reading Between the Lines

A news article discusses how a record company, Universal Music, is slashing
prices on CDs in an attempt to increase its revenues. The analysis points out
that using the data from Universal Music in the article, the demand for CDs is
inelastic so that a price cut will decrease Universals revenue.

New in the Seventh Edition

There are only a few minor changes to this chapter.

Te a c h i n g S u g g e s t i o n s
1. Teaching the Elements of Calculating Price Elasticity of Demand
a. Percentages and percentage changes. Many students need a refresher
for calculating percentage changes. Dont be afraid to start with this preelasticity warm up to assess the sharpness of your class. Ask: Suppose
that the campus bookstore increases the price of an economics text from
$75 to $100. What is the percentage increase in price? Many will say 25
percent instead of 33 percent.
b. Devise a Mnemonic for Elasticity Calculations. Many students have a
hard time remembering whether quantity or price goes in the numerator of
the elasticity formulas. Have the students create their own mnemonic.
Suggest McDonalds Quarter Pounder hamburgers. Its silly, but it works,
reminding the student that Q (quantity) appears before P (price) in the
ratio of percentage changes. (Remind them that using the alphabet wont
work.)
2. Elasticity and slope along a linear demand curve. After covering the
three categories of things which influence over the magnitude of the elasticity
value, you can provide solid intuition on why demand becomes more elastic
as we move up the linear demand curve and reinforce one of the categories.
Note how the price of the good or service is increasing, purchasing that good
or service will necessarily take up a larger and larger proportion of a fixed
budget. Consumers will naturally become more responsive to an increase in
price as we raise price along a demand curve.
3. Insights into the Cross Elasticities of Demand
Emphasize the information content in the algebraic sign of the cross elasticity
and the income elasticity. A negative sign indicates the goods are
complements and a positive sign indicates they are substitutes. Compare this
with the price elasticity of demand for which we focus only on the magnitude
and not the sign.
4. Insights into the elasticity of Supply
The unit elastic demand curve is a good one to use to emphasize that
elasticity and slope are not equal. Have the students calculate the elasticity of

ELASTICITY

87

supply on two linear demand curves that passes through the origin, one with a
slope of 0.5 and the other with a slope of 2. Theyll get the message.
5. Testing their knowledge of the elasticity formula. For each of the
following goods, the price increase was caused by a 10 percent decrease in
quantity supplied. Which good has an inelastic demand and which has an
elastic demand?
The price of gasoline increased from $1.00 to $1.50 per gallon.
(Inelastic)

The price of coffee increases from $5.00 to $6.00 per pound. (Inelastic)

The price of a theater ticket increased from $7.50 to $8.00. (Elastic)

The price of a large pizza increased from $10.00 to $11.00 (Unit elastic)

6. Testing their knowledge of the income elasticity formula. For each of

the following goods, assume the change in quantity resulted from a student
receiving a 50 percent increase in her income upon becoming employed full
time after graduation. Which of these goods does she consider as inferior
goods? Which are normal and income elastic? Which are normal and income
inelastic?

The quantity of Raman Noodles eaten declined from five boxes per day
to one box per month. (Inferior)

The quantity of margaritas consumed increased from 1 per week to 2

per week. (Income elastic)

The square feet of apartment space rented per month increased from
1000 to 1250 square feet per month. (Income inelastic)

The quantity of food consumed was unchanged. (Perfectly income

inelastic)

The Big Picture

Where we have been:
The student can now use the demand and supply model to generate
predictions and can supplement this knowledge with the ability to provide
richer predictions based on the elasticities of demand and supply.
Where we are going:
Demand, supply, and demand elasticity get an extensive work out in Chapter
6, where we use them to explain the division of a tax burden between buyer
and seller in the market for illegal drugs and the volatile revenues received by
agricultural firms. However, before doing that analysis, we study the efficiency
and fairness of markets in Chapter 5. Chapter 11 also uses elasticity to
contrast the long-run versus short-run response to a change in demand in
perfect competition. And the relationship between total revenue and the price
elasticity of demand is used in Chapter 12 to show that a monopoly never
operates on the inelastic part of the demand curve.

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O v e r h e a d Tr a n s p a r e n c i e s
Transparency

Text figure

20
21
22

Figure 4.2
Figure 4.3
Figure 4.4

23
24
25

Figure 4.5
Figure 4.7
Table 4.3

Transparency title
Calculating the Elasticity of Demand
Inelastic and Elastic Demand
Elasticity Along a Straight-Line Demand
Curve
Elasticity and Total Revenue
Cross Elasticity of Demand
A Compact Glossary of Elasticities

Electronic Supplements
MyEconLab
MyEconLab provides pre- and post-tests for each chapter so that
students can assess their own progress. Results on these tests feed an
individualized study plan that helps students focus their attention in
the areas where they most need help.
Instructors can create and assign tests, quizzes, or graded homework
assignments that incorporate graphing questions. Questions are
automatically graded and results are tracked using an online grade
book.
PowerPoint Lecture Notes
PowerPoint Electronic Lecture Notes with speaking notes are available
and offer a full summary of the chapter.
PowerPoint Electronic Lecture Notes for students are available in
MyEconLab.
Instructor CD-ROM with Computerized Test Banks
This CD-ROM contains Computerized Test Bank Files, Test Bank, and
Instructors Manual files in Microsoft Word, and PowerPoint files. All test
banks are available in Test Generator Software.

Additional Discussion Questions

1. Is the demand for higher education price elastic or price inelastic?
Use the students familiarity with college life to make them comfortable in
using an economic model to describe the demand for a college education.
Ask the students to assume that a survey of 100 state universities
revealed how real tuition price per class credit has increased an average of
20 percent over the past five years while that total class credits purchased
over the same period declined an average of only 5 percent. Ask the
students what assumptions would be necessary to ensure this measure of

ELASTICITY

89

the price elasticity of demand for college is valid. They should recognize
that ceteris paribus conditions should be observed:
The price of alternative education/training opportunities (substitutes)
was held constant.

The price of the amenities of college life like dorms, meal programs,
etc. (compliments) was held constant.

The income of the students or their parents was held constant.

If the tuition hike was in response to an increase in education

costs per class credit, should schools receive supplemental
revenues from the state taxpayers? Assume that many of these
schools lobbied their respective state governments to receive additional
revenues, citing a small but significant decrease in the number of students
taking course credits. If the demand for college education is truly inelastic,
ask the students to provide a possible justification for refusing this request.
The students should recognize that school enrollment is not the issue, but
total tuition revenues collected by the school that matters most. They
should recognize that even though the total number of student credits
declined, inelastic demand implies that the total tuition revenues received
from those fewer students must have increased along with the tuition
price.
2. Economic analysis and various law enforcement issues: The
students may be surprised to see how economic concepts can explain
much of what we observe happening in the area of law enforcement:
How does inelastic student demand for parking hinder police
efforts at preventing illegal student parking? Illegal student parking
is a hassle that every university police force must deal with. Ask the
students whether the campus police will have more success with doubling
the current parking fine, or liberally using the boot, which is a heavy iron
clamp locked to the wheel of a car, rendering it immobile. Students will
understand that raising the parking ticket fees is simply raising the price
for illegal parking, and if quantity demanded does not decrease very
much, demand for those choice parking spots is inelastic. To significantly
decrease the incidence of illegal parking, the price must be raised
substantially. Having their personal transportation severely restricted for a
period of time is a much higher price with a more effective result.
How does the inelastic demand for drugs help the police to
monitor the effectiveness of drug interdiction operations? Tell
students that if the demand for illegal drugs were very elastic, the
difference in the street price of drugs resulting from a relatively small
decrease in the supply would be difficult to discern from the noise of the
observed market data. Because the demand for drugs is very inelastic,
even a small decrease in supply will generate an easily discernable
increase in the street price. This is why the police commonly state how
much the street price increased after a drug bust. The police can easily get
feedback to learn which interdiction techniques and operations were the
most effective.
D. Fuel for thought: Getting some intuition on what determines
whether demand is inelastic or elastic:

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The demand for gasoline and junk food in general. Students love
their cars and to eat junk food and they know that the demand for both in
general is inelastic, because there are no good substitutes for personal
transportation or for a quick snack. Ask them if they think the demand for
these is elastic or inelastic. Theyll likely say that demand for fast access
junk food and gasoline is inelastic.
The demand for convenience store gasoline. Ask your students if Joes
Quick-Mart (substitute your actual local one) convenience store would lose
much business and total revenues if he raised the price of gasoline more
than a penny or two compared to the other three gas stations at the same
street intersection. When the students conclude hed lose much of his
gasoline sales, ask them to reconcile this large quantity decrease to a
small increase in price (elastic demand) with the fact that they earlier
stated that demand for gasoline is very inelastic. They will recognize that
gasoline from the other corner stations is a very good substitute for Joes
gasoline.
The demand for convenience store junk food. After students
recognize that demand elasticity is high when abundant substitutes are
available, ask the students why Joes Quick-Mart junk food (and all other
convenience stores junk food) is priced so much higher than the near-by
grocery stores junk food. Students will conclude that convenience stores
are well named. Most people arent willing to wait in the grocery store
check-out line behind the frazzled mother of three screaming kids, each
hanging on the over-loaded basket that will take 15 minutes of coupon
validating and price checking to complete the sale. The grocery store is
not a good substitute for people in a hurry who are looking for a fast snack
and a quick gas fill.
3. How can the owner of The Burger Barn determine if a one-day
promotional sale on milkshakes will affect the total revenues
generated by hamburger sales? This question will exercise student
knowledge of cross elasticities. First the students need to assume that the
price of burgers remains unchanged (ceteris paribus conditions must be
satisfied). Next, the students need to determine whether the cross
elasticity is positive (substitutes) or negative (compliments). If burgers are
substitutes, then burger revenues will decrease during the sale. However,
if burgers are compliments, then burger revenues will increase.
4. Lessons Learned from the 9-11 terrorist attacks: In the ensuing
months after the terrorist attacks, security concerns in the United States
were heightened when rumors and further proclamations of pending
chemical and biological attacks on the United States were reported in the
media. Ask the students if it would be important for the government to
know what the elasticity of supply would be for super-strength antibiotic
medicines (like the popularized medicine Ciprofloxacine) available on the
world market.

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91

Answers to the Review Quizzes

Page 88
1.

The elasticity of demand is a unit-free measure, which is a better

measure than the slope ratio for the responsiveness of quantity changes
to price changes. The slope of the demand curve will change as the units
measuring the same quantity of the good change (going from pounds to
ounces, for example). The value of the elasticity is independent of the
units used to measure the price and quantity of the product and can be
compared across the same good when quantity is measured in different
units, or can be compared across different goods when they are
measured in different units.
The price elasticity of demand is the absolute value (or magnitude) of
the ratio of the percentage change in the quantity demanded to the
percentage change in the price. The percentage change in quantity
(price) is measured as the change in quantity (price) divided by the
average quantity (price). The ratio of two percentages causes the unit
measures to disappear, leaving a unit-free measure.
Using the average of both price and quantity gives the elasticity at the
midpoint between the original price and the new price. If we only used
percentage change from the original price, we would have a larger value
for the elasticity between two prices when calculating for a price rise
than when calculating for a price fall. Using the average price and
quantity measures avoids the value of elasticity being dependent upon
whether a price change reflects a price increase or decrease.
The total revenue test is a method of estimating the price elasticity of
demand by observing the change in total revenue, given a change in
price, holding all other things constant. The total revenue test shows that
a price cut increases total revenue if demand is elastic, decreases total
revenue if demand is inelastic, and does not change total revenue if
demand is unit elastic.
The magnitude of the price elasticity of demand for a good depends on
three main influences:

2.

3.

4.

5.

6.

Closeness of substitutes. The more easily people can substitute other

items for a particular good, the larger is the price elasticity of demand
for that good.

The proportion of income spent on the good. The larger the portion of
the consumers budget being spent on a good, the greater is the price
elasticity of demand for that good.

The time elapsed since a price change. Usually, the more time that has
passed after a price change, the greater is the price elasticity of
demand for a good.
Demand for a necessity is generally less elastic than demand for a
luxury because: i) there are fewer substitutes for a necessity, and ii) the
proportion of our budgets spent on necessities is usually relatively larger
than on luxuries.

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Page 91
1.

Cross elasticity of demand measures how the quantity demanded of a

good responds to a change in the price of another good. The formula for
cross price elasticity is the percentage change in the quantity of the
good demanded divided by the percentage change in the price of the
related good.
The sign of the cross elasticity of demand reveals whether two goods are
substitutes or compliments: The cross elasticity of demand is positive for
substitute goods and negative for complement goods.
Income elasticity of demand measures how the quantity demanded of a
good responds to a change in income. The formula for income elasticity
is the percentage change in the quantity of the good demanded divided
by the percentage change in income.
The sign of income elasticity of demand reveals whether a good is a
normal good or an inferior good: The income elasticity of demand is
positive for normal goods and negative for inferior goods.
The level of a persons income can influence the income elasticity of
demand by changing how a good or service is perceived. Some goods,
such as automobiles, might seem like a luxury when a persons income
is very low, but seem like a necessity when income is very high.
Therefore, the income elasticity for some goods, like automobiles, might
decrease (become less elastic) as incomes increase.

2.

3.

4.

5.

Page 94
1.

Supply elasticity is an important component of understanding how

resources will be allocated when changes in the market lead producers
to adjust their level of output. For example, how much additional
antibiotics will be available if a sudden outbreak of anthrax is detected in
our country, resulting in a significant increase the demand for such
drugs?
The elasticity of supply measures the responsiveness of the quantity
supplied to a change in the price of a good when all other influences on
selling plans remain the same. The elasticity of supply is calculated by
the percentage change in the quantity supplied divided by the
percentage change in the price.
The main influences on the elasticity of supply are:

2.

3.

Resource substitution possibilities: the greater the suppliers ability to

substitute resources, the greater will be their ability to react to price
changes and the greater the elasticity of supply.

Time frame for the supply decision: the greater the amount of time
available after the price change, the greater is the suppliers ability to
adjust quantity supplied, and the greater the elasticity of supply.
4.
Students answers will vary. Here are some examples:
a) The momentary supply of wheat is perfectly inelastic. Once farmers
have brought their wheat to market, there is no other alternative use
for it and they sell it all regardless of the going price.

ELASTICITY

93

b) The short-run supply of wheat. If the farmers already have a mature

wheat crop but have not yet harvested it, farmers with both relatively
high and low yield fields may chose to harvest both types of fields if
the price for wheat is high. However, the farmers will not harvest their
low yield fields when the price of wheat is relatively low, in order to
economize on added labor costs.
c) The supply of wheat to an individual buyer. Any one buyer can
purchase as much wheat at the going price as he or she desires.
However, no quantity of wheat will be supplied at a lower price.
5.
The momentary supply, short-run supply, and long-run supply all
illustrate the response of suppliers to changes in the price, but they
differ according to how much time has elapsed after the price change.

The momentary supply curve is frequently the least elastic and shows
how suppliers cannot easily respond to a price change immediately
after the price change occurs. Changing the quantity produced means
changing the inputs into the production process, which takes time to
complete. Sometimes the momentary supply is perfectly inelastic.

The short-run supply shows suppliers response after enough time has
elapsed for some, but not all, of the possible technological adjustments
have been made. Short-run supply generally is intermediate in
elasticity between the momentary supply and the long-run supply.

The long-run supply shows how suppliers react after enough time has
passed that all possible adjustments to productive factors have been
made to accommodate the price change. It usually is the most elastic
of the three supply curves.

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Answers to the Problems

1. a. The price elasticity of demand is 1.25.
The price elasticity of demand equals the percentage change in the
quantity demanded divided by the percentage change in the price. The
price rises from $4 to $6 a box, a rise of $2 a box. The average price is
$5 a box. So the percentage change in the price equals $2 divided by
$5, which equals 40 percent.
The quantity decreases from 1,000 to 600 boxes, a decrease of 400
boxes. The average quantity is 800 boxes. So the percentage change in
quantity equals 400 divided by 800, which equals 50 percent.
The price elasticity of demand for strawberries equals 50 divided by 40,
which is 1.25.
b. The price elasticity of demand exceeds 1, so the demand for
strawberries is elastic.
2. a. The price elasticity of demand is 1.5.
The price elasticity of demand equals the percentage change in the
quantity demanded divided by the percentage change in the price. The
price falls from $7 to $5 a basket, a fall of $2 a basket. The average
price is $6 a basket. So the percentage change in the price equals $2
divided by $6, which equals 33.3 percent.
The quantity increases from 300 to 500 baskets, an increase of 200
baskets. The average quantity is 400 baskets. So the percentage
change in quantity equals 200 divided by 400, which equals 50
percent.
The price elasticity of demand for tomatoes equals 50 divided by 33.3,
which is 1.5.
b. The price elasticity of demand exceeds 1, so the demand for tomatoes
is elastic.
3. a. The price elasticity of demand is 2.
When the price of a videotape rental rises from $3 to $5, the quantity
demanded of videotapes decreases from 75 to 25 a day. The price
elasticity of demand equals the percentage change in the quantity
demanded divided by the percentage change in the price.
The price increases from $3 to $5, an increase of $2 a videotape. The
average price is $4 a videotape. So the percentage change in the price
equals $2 divided by $4, which equals 50 percent.
The quantity decreases from 75 to 25 videotapes, a decrease of 50
videotapes. The average quantity is 50 videotapes. So the percentage
change in quantity equals 50 divided by 50, which equals 100 percent.
The price elasticity of demand for videotape rentals equals 100 divided
by 50, which is 2.
b. The price elasticity of demand equals 1 at $3 a videotape.
The price elasticity of demand equals 1 at the price halfway between
the origin and the price at which the demand curve hits the y-axis. That
price is $3 a videotape.
4. a. The price elasticity of demand is 2.

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95

When the price of a pen rises from $6 to $10, the quantity demanded
of pens decreases from 60 to 20 a day. The price elasticity of demand
equals the percentage change in the quantity demanded divided by
the percentage change in the price.
The price rises from $6 to $10, an increase of $4 a pen. The average
price is $8 a pen. So the percentage change in the price equals $4
divided by $8, which equals 50 percent.
The quantity decreases from 60 to 20 pens, a decrease of 40 pens. The
average quantity is 40 pens. So the percentage change in quantity
equals 40 divided by 40, which equals 100 percent.
The price elasticity of demand for pens equals 100 divided by 50,
which is 2.
b. The price elasticity of demand equals 1 at $6 a pen. The price elasticity
of demand is greater than 1 at prices greater than $6 a pen. The price
elasticity of demand is less than 1 at prices less than $6 a pen.
The price elasticity of demand equals 1 at the price halfway between
the origin and the price at which the demand curve hits the y-axis. That
price is $6 a pen.
The demand curve is linear. Along a linear demand curve, the price
elasticity of demand is greater than 1 at points above the midpoint and
less than 1 at points below the midpoint. The price elasticity of demand
is greater than 1 at prices above $6 a pen and less than 1 at prices
below $6 a pen.
5. The demand for dental services is unit elastic.
The price elasticity of demand for dental services equals the percentage
change in the quantity of dental services demanded divided by the
percentage change in the price of dental services.
The price elasticity of demand equals 10 divided by 10, which is 1. The
demand is unit elastic.
6. The demand for haircuts is elastic.
The price elasticity of demand for haircuts equals the percentage change
in the quantity of haircuts demanded divided by the percentage change in
the price of a haircut.
The price elasticity of demand equals 10 divided by 5, which is 2. The
demand for haircuts is elastic.
7. a. Total revenue increases.
When the price of a chip is $400, 30 million chips are sold and total
revenue equals $12,000 million. When the price of a chip falls to $350,
35 million chips are sold and total revenue is $12,250 million. Total
revenue increases when the price falls.
b. Total revenue decreases.
When the price is $350 a chip, 35 million chips are sold and total
revenue is $12,250 million. When the price of a chip is $300, 40 million
chips are sold and total revenue decreases to $12,000 million. Total
revenue decreases as the price falls.
c. Total revenue is maximized at $350 a chip.

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When the price of a chip is $300, 40 million chips are sold and total
revenue equals $12,000 million. When the price is $350 a chip, 35
million chips are sold and total revenue equals $12,250 million. Total
revenue increases as the price rises from $300 to $350 a chip. When
the price is $400 a chip, 30 million chips are sold and total revenue
equals $12,000 million. Total revenue decreases as the price rises from
$350 to $400 a chip. Total revenue is maximized when the price is
$350 a chip.
d. The demand for chips is unit elastic.
The total revenue test says that if the price changes and total revenue
remains the same, the demand is unit elastic at the average price. For
an average price of $350 a chip, cut the price from $400 to $300 a
chip. When the price of a chip falls from $400 to $300, total revenue
remains at $12,000 million. So at the average price of $350 a chip,
demand is unit elastic.
8. a. Total revenue increases.
When the price of a pound of sugar is $5, 25 million pounds are sold
and total revenue equals $125 million. When the price of a pound of
sugar rises to $15, 15 million pounds are sold and total revenue is $225
million. Total revenue increases.
b. Total revenue does falls.
When the price of a pound of sugar is $15, 15 million pounds are sold
and total revenue is $225 million. When the price of a pound of sugar is
$25, 5 million pounds are sold and total revenue is $125 million. Total
revenue falls.
c. Total revenue is maximized at $15 a pound.
The total revenue test says that if the price rises and total revenue
remains the same, total revenue is maximized and demand is unit
elastic at the average price. Total revenue is maximized at the price at
which price elasticity of demand is 1. Draw the graph and extend the
demand (which is linear) until it cuts the y-axis. The price halfway
between the origin and the price at which the demand curve cuts the yaxis is the price at which elasticity is 1. The demand curve will cut the
y-axis at $30 a pound. So the elasticity of demand for sugar equals 1 at
a price of $15 a pound.
You can check your answer by calculating the elasticity at an average
price of $15 a pound. When the price rises from $10 to $20 a pound,
the average price is $15 a pound.
The price rises from $10 to $20, an increase of $10 a pound. The
average price is $15 a pound. So the percentage change in the price
equals $10 divided by $15, which equals 66.67 percent.
The quantity decreases from 20 to 10 pounds, a decrease of 10
pounds. The average quantity is 15 pounds. So the percentage change
in quantity equals 10 divided by 15, which equals 66.67 percent.
The price elasticity of demand equals 66.7/66.7, which is 1.
d. The demand for sugar is elastic.
The total revenue test says that if the price rises and total revenue
decreases, the demand is elastic at the average price. For an average

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97

price of $20 a pound, raise the price from $15 to $25 a pound.
Question 8(b) has calculated the change in total revenue when the
price rises from $15 to $25 a pound. Total revenue decreases from
$225 million to $125 million. So at the average price of $20 a pound,
demand is elastic.
9. The demand for chips is inelastic.
The total revenue test says that if the price falls and total revenue falls, the
demand is inelastic. When the price falls from $300 to $200 a chip, total
revenue decreases from $12,000 million to $10,000 million. So at an
average price of $250 a chip, demand is inelastic.
10. The demand for sugar is inelastic.
The total revenue test says that if the price rises and total revenue
increases, the demand is inelastic at the average price. For an average
price of $10 a pound, raise the price from $5 to $15 a pound. Question 8(a)
has calculated the change in total revenue when the price rises from $5 to
$15 a pound. Total revenue increases from $75 million to $225 million. So
at the average price of $10 a pound, demand is inelastic.
11. The cross elasticity of demand between orange juice and apple juice is
1.17.
The cross elasticity of demand is the percentage change in the quantity
demanded of one good divided by the percentage change in the price of
another good. The rise in the price of orange juice resulted in an increase
in the quantity demanded of apple juice. So the cross elasticity of demand
is the percentage change in the quantity demanded of apple juice divided
by the percentage change in the price of orange juice. The cross elasticity
equals 14 divided by 12, which is 1.17.
12. The cross elasticity of demand between chicken and beef is 4.
The cross elasticity of demand is the percentage change in the quantity
demanded of one good divided by the percentage change in the price of
another good. The fall in the price of chicken resulted in a decrease in the
quantity demanded of beef. So the cross elasticity of demand is the
percentage change in the quantity demanded of beef divided by the
percentage change in the price of chicken. The cross elasticity equals 20
divided by 5, which is 4.
13. Income elasticity of demand for (i) bagels is 1.33 and (ii) donuts is 1.33.
Income elasticity of demand equals the percentage change in the quantity
demanded divided by the percentage change in income. The change in
income is $2,000 and the average income is $4,000, so the percentage
change in income equals 50 percent.
(i) The change in the quantity demanded is 4 bagels and the average
quantity demanded is 6 bagels, so the percentage change in the quantity
demanded equals 66.67 percent. The income elasticity of demand for
bagels equals 66.67/50, which is 1.33.
(ii) The change in the quantity demanded is 6 donuts and the average
quantity demanded is 9 donuts, so the percentage change in the quantity
demanded is 66.67. The income elasticity of demand for donuts equals
66.67/50, which is 1.33.

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14. Income elasticity of demand for (a) concert tickets is 0.56 and (b) bus rides
is 0.375.
Income elasticity of demand equals the percentage change in the quantity
demanded divided by the percentage change in income. The change in
income is $4,000 and the average income is $15,000, so the percentage
change in income equals 26.67 percent.
(a) The change in the quantity demanded of concert tickets is 15 percent.
The income elasticity of demand for concert tickets equals 15/26.67, which
is 0.56.
(b) The change in the quantity demanded of bus rides is 10 percent. The
income elasticity of demand for bus rides equals 10/26.67, which is
0.375.
15. a. The elasticity of supply is 1.
The elasticity of supply is the percentage change in the quantity
supplied divided by the percentage change in the price. When the price
falls from 40 cents to 30 cents, the change in the price is 10 cents and
the average price is 35 cents. The percentage change in the price is
28.57.
When the price falls from 40 cents to 30 cents, the quantity supplied
decreases from 800 to 600 calls. The change in the quantity supplied is
200 calls, and the average quantity is 700 calls, so the percentage
change in the quantity supplied is 28.57.
The elasticity of supply equals 28.57/28.57, which equals 1.
b. The elasticity of supply is 1.
The formula for the elasticity of supply calculates the elasticity at the
average price. So to find the elasticity at an average price of 20 cents a
minute, change the price such that 20 cents is the average pricefor
example, a fall in the price from 30 cents to 10 cents a minute.
When the price falls from 30 cents to 10 cents, the change in the price
is 20 cents and the average price is 20 cents. The percentage change
in the price is 100. When the price falls from 30 cents to 10 cents, the
quantity supplied decreases from 600 to 200 calls. The change in the
quantity supplied is 400 calls and the average quantity is 400 calls.
The percentage change in the quantity supplied is 100.
The elasticity of supply is the percentage change in the quantity
supplied divided by the percentage change in the price. The elasticity
of supply is 1.
16. a. The elasticity of supply is 3.25.
The elasticity of supply is the percentage change in the quantity
supplied divided by the percentage change in the price. When the price
rises from $125 to $135, the change in the price is $10 and the
average price is $130. The percentage change in the price is 7.7.
When the price rises from $125 to $135, the quantity supplied
increases from 2,800 to 3,600 million pairs. The change in the quantity
supplied is 800 million pairs, and the average quantity is 3,200 million
pairs, so the percentage change in the quantity supplied is 25.
The elasticity of supply equals 25/7.7, which equals 3.25.

ELASTICITY

99

b. The elasticity of supply is 3.57.

The formula for the elasticity of supply calculates the elasticity at the
average price. So to find the elasticity at $125, change the price such
that $125 is the average pricefor example, a fall in the price from
$130 to $120.
When the price falls from $130 to $120, the change in the price is $10
and the average price is $125. The percentage change in the price is 8.
When the price falls from $130 to $120, the quantity supplied
decreases from 3,200 to 2,400 million pairs. The change in the quantity
supplied is 800 millions pairs and the average quantity is 2,800 million
pairs. The percentage change in the quantity supplied is 28.57.
The elasticity of supply is the percentage change in the quantity
supplied divided by the percentage change in the price. The elasticity
of supply is 3.57.

Additional Problems
1. Better-than-average weather brings a bumper tomato crop. The price of
tomatoes falls from $7 to $5 a basket, and the quantity demanded
increases from 300 to 500 baskets a day. Over this price range,
a. What is the price elasticity of demand?
b. Describe the demand for tomatoes.
2. The figure shows the demand for
pens.
a. Calculate the elasticity of
demand for a rise in price from
$2 to $4.
b. At what prices is the elasticity of
demand equal to 1, greater than
1, and less than 1?

3. If the quantity of fish demanded decreases by 5 percent when the price of

fish rises by 10 percent, is the demand for fish elastic, inelastic, or unit
elastic?
4. The table gives the demand schedule for coffee.

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Price

5.
6.

7.

8.

Quantity
demanded
(millions of
pounds per year)

(dollars
per
pound)
10
30
15
25
20
20
25
15
a. What happens to total revenue if the price of coffee rises from $10 to
$20 per pound?
b. What happens to total revenue if the price rises to $15 to $25 per
pound?
c. What is the price when total revenue at a maximum?
d. What quantity of coffee will be sold at the price that answers problem
8(c)?
e. At an average price of $15 a pound, is the demand for coffee elastic or
inelastic? Use the total revenue test to answer this question.
In problem 4, at $15 a pound, is the demand for coffee elastic or inelastic?
Use the total revenue test to answer this question.
If a 5 percent fall in the price of beef increases the quantity of beef
demanded by 20 percent and decreases the quantity of chicken demanded
by 15 percent, calculate the cross elasticity of demand between beef and
chicken.
Judys income has increased from $10,000 to $12,000. Judy increased her
demand for concert tickets by 10 percent and decreased her demand for
bus rides by 5 percent. Calculate Judys income elasticity of demand for (a)
concert tickets and (b) bus rides.
The table gives the supply schedule for shoes.
Price
Quantity
supplied
(dollars per
(millions of pairs
pair)
per year)
120
1,200
125
1,400
130
1,600
135
1,800
Calculate the elasticity of supply when
a. The price rises from $125 to $135 a pair.
b. The price is $125 a pair.

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101

Solutions to Additional Problems

1. a. The price elasticity of demand is 1.67.
The price elasticity of demand equals the percentage change in the
quantity demanded divided by the percentage change in the price. The
price falls from $6 to $4 a basket, a fall of $2 a basket. The average
price is $5 a basket. So the percentage change in the price equals $2
divided by $5, which equals 40 percent.
The quantity increases from 200 to 400 baskets, an increase of 200
baskets. The average quantity is 300 baskets. So the percentage
change in quantity equals 200 divided by 300, which equals 66.7
percent.
The price elasticity of demand for tomatoes equals 66.7 divided by 40,
which is 1.67.
b. The price elasticity of demand exceeds 1, so the demand for tomatoes
is elastic.
2. a. The price elasticity of demand is 0.33.
When the price of a pen rises from $2 to $4, the quantity demanded of
pens decreases from 100 to 80 a day. The price elasticity of demand
equals the percentage change in the quantity demanded divided by
the percentage change in the price.
The price increases from $2 to $4, an increase of $2 a pen. The
average price is $3 a pen. So the percentage change in the price
equals $2 divided by $3, which equals 66.7 percent.
The quantity decreases from 100 to 80 pens, a decrease of 20 pens.
The average quantity is 90 pens. So the percentage change in quantity
equals 20 divided by 90, which equals 22 percent.
The price elasticity of demand for pens equals 22 divided by 66.7,
which is 0.33.
b. The price elasticity of demand equals 1 at $6 a pen. The price elasticity
of demand is greater than 1 at prices greater than $6 a pen. The price
elasticity of demand is less than 1 at prices less than $6 a pen.
The price elasticity of demand equals 1 at the price halfway between
the origin and the price at which the demand curve hits the y-axis. That
price is $6 a pen.
The demand curve is linear. Along a linear demand curve, the price
elasticity of demand is greater than 1 at points above the midpoint and
less than 1 at points below the midpoint. The price elasticity of demand
is greater than 1 at prices above $6 a pen and less than 1 at prices
below $6 a pen.
3. The demand for fish is inelastic.
The price elasticity of demand for fish equals the percentage change in the
quantity of fish demanded divided by the percentage change in the price
of fish.
The price elasticity of demand equals 5 divided by 10, which is 0.5. The
demand is inelastic.
4. a. Total revenue increases.

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b.

c.

d.

e.

When the price of a pound of coffee is $10, 30 million pounds are sold
and total revenue equals $300 million. When the price of a pound of
coffee rises to $20, 20 million pounds are sold and total revenue is
$400 million. Total revenue increases.
Total revenue does not change.
When the price of a pound of coffee is $15, 25 million pounds are sold
and total revenue is $375 million. When the price of a pound of coffee
is $25, 15 million pounds are sold and total revenue is $375 million.
Total revenue does not change.
Total revenue is maximized at $20 a pound.
When the price of a pound of coffee is $20, 20 million pounds are sold
and total revenue equals $400 million. When the price is $15 a pound,
25 million pounds are sold and total revenue equals $375 million. Total
revenue increases as the price rises from $15 to $20 a pound. When
the price is $25 a pound, 15 million pounds are sold and total revenue
equals $375 million. Total revenue decreases as the price rises from
$20 to $25 a pound. Total revenue is maximized when the price is $20
a pound.
The quantity will be 20 million pounds a year.
The demand schedule tells us that when the price is $20 a pound, the
quantity of coffee demanded is 20 million pounds a year.
The demand for coffee inelastic.
The total revenue test says that if the price rises and total revenue
increases, the demand is inelastic at the average price. For an average
price of $15 a pound, raise the price from $10 to $20 a pound. When
the price of a pound rises from $10 to $20, total revenue increases
from $300 million to $400 million. So at the average price of $15 a
pound, demand is inelastic.

5. The demand for coffee inelastic.

The total revenue test says that if the price rises and total revenue
increases, the demand is inelastic at the average price. For an average
price of $15 a pound, raise the price from $10 to $20 a pound. When the
price of a pound rises from $10 to $20, total revenue increases from $300
million to $400 million. So at the average price of $15 a pound, demand is
inelastic
6. The cross elasticity of demand between beef and chicken is 2.
The cross elasticity of demand is the percentage change in the quantity
demanded of one good divided by the percentage change in the price of
another good. The fall in the price of beef resulted in a decrease in the
quantity demanded of chicken. So the cross elasticity of demand is the
percentage change in the quantity demanded of chicken divided by the
percentage change in the price of beef. The cross elasticity equals 20
divided by 10, which is 2.
7. Income elasticity of demand for (a) concert tickets is 0.55 and (b) bus rides
is 0.275.
Income elasticity of demand equals the percentage change in the quantity
demanded divided by the percentage change in income. The change in

ELASTICITY

103

income is $2,000 and the average income is $11,000, so the percentage

change in income equals 18.2 percent.
(a) The change in the quantity demanded of concert tickets is 10 percent.
The income elasticity of demand for concert tickets equals 10/18.2,
which is 0.55.
(b) The change in the quantity demanded of bus rides is 5 percent. The
income elasticity of demand for bus rides equals 5/18.2, which is
0.275.
8. a. The elasticity of supply is 1.
The elasticity of supply is the percentage change in the quantity
supplied divided by the percentage change in the price. When the price
rises from $125 to $135, the change in the price is $10 and the
average price is $130. The percentage change in the price is 7.7.
When the price rises from $125 to $135, the quantity supplied
increases from 1,400 million to 1,800 million pairs. The change in the
quantity supplied is 400 million pairs, and the average quantity is
1,600 million pairs, so the percentage change in the quantity supplied
is 25.
The elasticity of supply equals 25/7.7, which equals 3.25.
b. The elasticity of supply is 1.
The formula for the elasticity of supply calculates the elasticity at the
average price. So to find the elasticity at $125, change the price such
that $125 is the average pricefor example, a fall in the price from
$130 to $120.
When the price falls from $130 to $120, the change in the price is $10
and the average price is $125. The percentage change in the price is 8.
When the price falls from $130 to $120, the quantity supplied
decreases from 1,600 million to 1,200 million pairs. The change in the
quantity supplied is 400 millions pairs and the average quantity is
1,400 million pairs. The percentage change in the quantity supplied is
28.57.
The elasticity of supply is the percentage change in the quantity
supplied divided by the percentage change in the price. The elasticity
of supply is 3.57.