Elasticity . . .
… is a measure of how much buyers
and sellers respond to changes in
market conditions. . .
… allows us to analyze supply and
demand with greater precision.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Elasticity: A General Definition:
The percentage (%) change in
something . . .
. . . given a one percent (1%) change
in something else.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Price Elasticity of Demand
P
Demand
A
B
The percentage change
in the quantity
demanded given. . .
. . . a one percent
change in the price.
Q
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Ranges of Elasticity . . .
Perfectly
Inelastic
Consumers are
“completely unresponsive” to price changes.
Perfectly
Elastic
Consumers are “extremely
responsive” to price changes.
Unit
Elastic
Response is “equal to” change in
price.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Elasticity of Demand Illustrated
Perfectly Inelastic
P2
P1
Even if price
increases a lot
quantity demanded
stays the same.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Elasticity of Demand Illustrated
P1
A small increase
in price will cause
demand to drop off
completely.
Perfectly Elastic
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Computing Elasticity Coefficient
Price Elasticity
=
of Demand
Percentage Change in
Quantity Demanded
Percentage Change
in Price
Computed
as the percentage change
in the quantity demanded divided by
the percentage change in price.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Computing Elasticity Coefficient
Demand for
Ice Cream
E
D
=
(8 - 10) / 10
2.20
($2.20 - $2.00) / $2.00
2.00
8
10
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Elasticity and Total Revenue
ED > 1 then
P Q
and
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
TR
First Canadian Edition
Elasticity and Total Revenue
ED < 1 then
P Q
and
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
TR
First Canadian Edition
Income Elasticity of Demand
The percentage change in the quantity
demanded
given a one percent change in income.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Computing Income Elasticity
Income Elasticity
=
of Demand
Percentage Change in
Demand
Percentage Change
in Income
Computed
as the percentage change in
demand divided by the percentage
change in Income.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Income Elasticity... Types
YD > 0 Normal Goods
YD < 0 Inferior Goods
YD = 0 Income-neutral Goods
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Price Elasticity of Supply
The percentage
change in
quantity supplied
resulting from a
one (1) percent
change in price.
Price
B
A
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Determinants of
Elasticity of Supply
Flexibility
or ability of sellers to
change the amount of the good they
produce.
Beachfront land vs. books, cars,
manufactured goods, etc.
– More elastic in the long run.
–
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Computing Elasticity Coefficient
Elasticity
of Supply
=
Percentage Change in
Quantity Supplied
Percentage Change
in Price
Computed
as the percentage change
in the quantity supplied divided by
the percentage change in price.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Applications of Elasticity
“Can Good News for Farming Be Bad
News For Farmers?”
What happens to wheat farmers and
the market for wheat when university
agronomists discover a new wheat
hybrid that is more productive than
existing varieties?
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Apply Comparative Statics
Examine whether the supply or
demand curve shifts.
Consider the direction the curve
shifts.
Use supply-and-demand diagrams to
see how the market equilibrium
changes. Consider the state of
elasticity.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Consider which direction the curve shifts.
SA
Price
SB
Technology
causes an
increase
in supply.
$4.00
DA
2000
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
Quantity
First Canadian Edition
Compute Elasticity
ED =
ED =
(2400 - 2000) / (2000)
($2.60 - $4.00) / ($4.00)
0.57 (Inelastic)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition
Observe the Change in Total Revenue
SA
SB
Price
TRSA = $8,000
$4.00
$2.60
TRSB = $5,760!
DA
2000 2400
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5
First Canadian Edition