The Measurement of Elasticities
The Measurement of Elasticities
The Measurement of Elasticities
e= −
ΔQ/Q = − ΔQ . P
ΔP/P ΔP Q
Demand is said to be elastic if e > 1, inelastic if e < 1 and unitary elastic if e = 1.
EXAMPLE 1. Given the market demand schedule in Table 1.1 and market demand curve in Fig.
1-1, we can find e for a movement from point B to point D and from D to B, as follows:
Table 1.1
Point Px($) Qx
A 8 0
B 7 1000 Px($)
C
D
6
5
2000
3000 8 .. A
B
F
G
H
4
3
2
4000
5000
6000
7
6 .. C
D
L
M
1
0
7000
8000
5
4 ..
F
G
3
2 ..
H
L DX
1
0
1000 3000 5000 7000
.
M
Qx
Q − Q B PB Fig.1-1
From B to D, e=− D . = − 2000 7 = 7
PD − PB Q B −2 1000
Q B − Q D PD
= − − 2000 5 1.67
From D to B, e=− .
PB − PD Q D 2 3000
We can avoid getting different results by using the average of the two prices [(PB+PD)/2] and the
average of the two quantities [(QB+QD)/2] instead of either PB and QB or PD and QD in the
formula to find e. Thus,
(P + P )/2 P +P
e = − ΔQ . B D = − ΔQ . B D
ΔP (Q B + Q D )/2 ΔP Q B + Q D
Applying this modified formula to find e either for a movement form B to D or for a movement
from D to B we get
e = − − 2000 12 = 3
2 4000
This is the equivalent of finding e at the point midway between B and D (i.e., at point C).
Example-2. Given the market demand schedule in Table 1.2 and the market demand curve in Fig.
1-2, we can find e for a movement from point C to point F, from F to C and midway between C
and F, as follows:
Table 1.2 Px($)
Point Px($) Qx
A
B
7
6
500
750 7 .. A
C
D
5
4
1250
2000
6
5
4
B
. C
.. D©
F 3 3250 D F
G
H
2
1
4750
8000
3
2
1
.
G
. Dy
H
0 Qy
2000 4000 6000 8000
Fig.1-2
e = − ΔQ . C = − 2000 5 = 4
P
From C to F,
ΔP QC − 2 1250
EXAMPLE 3. We can find the elasticity of demand curve in Example 1 at point C geometrically
as follows. (For easy reference, Fig. 1-1, with some modifications, is repeated here as Fig. 1-3).
Since we want to measure elasticity at point C, we have only a single price and a single quantity.
Expressing each of the values in the formula for e in terms of distances, we get:
Px($)
e = − ΔQ P 8 . A
ΔP Q
= NM NC
7
6
5
. C
NC ON
4
= NM = 6000 = 3 3
ON 2000
2
1
0
2000
N
4000 6000
.
DX
8000
M
Qx
Fig.1-3
INCOME ELASTICITY OF DEMAND
The coefficient of income elasticity of demand (eM) measures the percentage change in
the amount of a commodity purchased per unit of time (Q/Q) resulting from a given percentage
change in a consumer’s income (M/M). Thus
e M = ΔQ/Q = ΔQ M
ΔM/M ΔM Q
When eM is negative, the good is inferior. If eM is positive, the good is normal. A normal good is
usually a luxury if its eM >1, otherwise it is a necessity. Depending on the level of the consumer’s
income, eM for a good is likely to vary considerably. Thus a good may be a luxury at “low”
levels of income, a necessity at “intermediate” levels of income and an inferior good at “high”
levels of income.
EXAMPLE 4. Columns (1) and (2) of Table 1.3 show the quantity of commodity X that an
individual would purchase per year at various income levels. Column (5) gives the coefficient of
income elasticity of demand of this individual for commodity X between the various successive
levels of available income. Column (6) indicates the range of income over which commodity X
is a luxury, a necessity or an inferior good.
Table 1.3
ΔQx Py + 10 40
e xy = = = +0.5
ΔPy Q x + 20 40
ΔQx Pz − 5 10
e xz = = = −0.125
ΔPz Q x + 10 40
Since exy is positive, tea and coffee are substitutes. Since exz is negative, tea and lemons are
complements.