This document is a chapter from a microeconomics textbook that discusses the concept of elasticity of demand and supply. It defines four types of elasticity - price elasticity of demand, cross elasticity of demand, income elasticity of demand, and price elasticity of supply. For each type, it provides the definition, formula, and categories (e.g. elastic vs. inelastic). It also provides examples and discusses how to calculate elasticities. The chapter concludes with an in-class activity for students to discuss examples of different elasticities of demand and supply.

1. BAEB602
MICROECONOMICS
CHAPTER 3
ELASTICITY OF DEMAND AND SUPPLY
PREPARED BY:
Nur Suhaili Ramli
School of Marketing and
Entrepreneurship (SoME)
FACULTY OF BUSINESS AND MANAGEMENT

2. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Types
TOPIC
 There are four types of elasticity:
 Price elasticity of demand
 Cross elasticity of demand
 Income elasticity of demand
 Price elasticity of supply
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3. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Price elasticity of demand
TOPIC
 Can be defined as a measure of the responsiveness of quantity demanded of a
good to a change in its price with other determinants remain the same (ceteris
paribus).
Formula:
 PED = Percentage change in quantity demanded for a good
Percentage change in its price.
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4. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Example
TOPIC
 Suppose that the 10% increase in the price of petrol causes the amount of
petrol demanded to fall by 20%, then PED can be calculated as:
 Price Elasticity of Demand = 20%
10%
= 2
An elasticity coefficient of 2 means that, for every one percent change in the price
of petrol, there will be a corresponding change in quantity demanded of petrol by
two percent.
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5. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
The Values of Price Elasticity of Demand
TOPIC
 If the price elasticity of demand coefficient is less than one but greater than
zero, then demand is inelastic.
 If the price elasticity of demand coefficient is greater than one but less than
infinity, then demand is elastic.
 If the price elasticity of demand coefficient is exactly equal to one, then demand
is unit elastic.
 If the price elasticity of demand coefficient is exactly equal to 0, the demand is
said to be perfectly inelastic.
 If the price elasticity of demand coefficient is exactly equal to infinity, the
demand is said to be perfectly elastic.
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6. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Cross Elasticity of Demand
TOPIC
 Cross Elasticity of Demand (XED) is a measure of the responsiveness of
quantity demanded for a good to change in the price of another good with other
determinants remain the same.
Formula:
XED = Percentage change in quantity demanded of good A
Percentage change in the price of good B
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7. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Categories of Cross Elasticity of Demand
TOPIC
 Cross elasticity of demand can be positive (XED greater than zero) or negative
(XED less than zero).
 In the case of substitute goods, such as butter and margarine, the cross
elasticity of demand will be positive (XED greater than zero).
 However if two related goods are complementary, such as bread and butter,
the cross elasticity of demand will be negative (XED less than zero).
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8. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Income Elasticity of Demand
TOPIC
 The relationship between quantity demanded of a good and income can be
measured using the concept of income elasticity of demand.
 Measure the responsiveness of quantity demanded for a good to a change in
income with other determinants remain the same.
 YED = Percentage change in quantity demanded
Percentage change in income
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9. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Categories of Income Elasticity of Demand
TOPIC
 If the income elasticity is positive (YED>0), it indicates a positive relationship
between quantity demanded for a good and income. Thus we say that the good
is normal good.
 However, if the income elasticity is negative (YED<0), it indicates a negative
relationship between quantity demanded for a good and income. Thus, we say
that the good is inferior good. Some examples of negative income elasticity of
demand is bus travel and used car.
 If the income elasticity is zero (YED = 0), it indicates that quantity demanded
remain constant as income rises, and we say the good is necessity good.
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10. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Price Elasticity of Supply
TOPIC
 Measure the responsiveness of quantity supplied of a good to change in its
price.
 Measure by dividing the percentage change in quantity supplied with the
percentage change in its price. That is;
PES = Percentage change in quantity supplied
Percentage change in its price.
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11. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
Different Types of Price Elasticity of Supply
TOPIC
 There are different types of price elasticity of supply. Supply is:
 Inelastic – if there is a less than proportionate response in supply to a change
in price.
 Elastic – if there is a more than proportionate response in supply to a change
in price
 Unit Elastic – if the percentage change in quantity supplied equals the
percentage change in price.
 Perfectly inelastic – if there is no response in supply to a change in price.
 Perfectly elastic – if producers are prepared to supply any amount at a given
price.
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12. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLY
CLASS ACTIVITY
TOPIC
 Perform a group of 4.
 Discuss with examples for both Demand and Supply according to the following:
 Inelastic
Elastic
Unit elastic
Perfectly inelastic
Perfectly elastic
 Additional marks to be given for any additional information (different from other
groups)
 Submission date: next week
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