Elasticity, Total Revenue and Surplus
Quick Check 1
Items that are necessities are
considered to be _____________
 inelastic

Quick Check 2
If TR and price go in opposite directions,
the good is considered to be _______
 Elastic

Quick Check 3
List the determinants of elasticity
 P- the proportion of income spent on the
good
 A- availability of close substitutes (the
more subs. The more elastic)
 I- the importance of a good (luxury v
necessity)
 D- the ability to delay the purchase (the
more time, the more elastic)

Quick Check 4
If a good has an elasticity coefficient of
0, that good is said to be ___________
 Perfectly inelastic

Price
Price Elasticity
$8
7
6
5
4
3
2
1
0
0
Elastic
Ed > 1
Unit Elastic
Ed = 1
Inelastic
Ed < 1
a
b
c
d
e
f
g
h
1
2 3
4 5
6
Quantity Demanded
7 8
D
Excise Taxes
 Governments
tend to tax inelastic
products to ensure high revenues
 Ex- liquor, gasoline and tobacco
Price Elasticity of Supply

If producers are relatively responsive to price
changes, supply is elastic. If producers are relatively
unresponsive to price change, supply is inelastic
Es = Percentage change in quant
supplied of product x/percentage change
in price of product x
 Or….Es = change S/sum of S/2 /
change P/sum P/2


Ex- Solve Es for an increase in price from $4-6 and
increase in quantity supplied from 10 units to 14
units (use midpoint)
Check your work
 Es
= change quant
supplied/(sum of Qs/2)/(change
price/sum of P/2)
 = ((14-10)/(14+10/2))/((64)/(6+4/2))
 = (4/12)/(2/5)
 = .33/.40
 = .83
Price Elasticity of Supply Cont’d
 The
degree of price elasticity of
supply depends on how easily
and quickly producers can shift
resources between alternative
uses
Market Period
 A period
that occurs when the
time immediately after a change
in market price is too short for
producers to respond with a
change in quantity supplied
Market Period Continued
 Ex-
perishable items are perfectly
inelastic such as beets. Farmers will
sell all of their product because they
will go bad
 The market period for a farmer is the
growing season
Short run
a
period of time too short to
change plant capacity but long
enough to use fixed plant more or
less intensively
Long Run
Time period long enough for firms to
adjust plant sizes and for new firms to
enter and old firms to leave an industry
 Ex- in the tomato industry the farmer
has time to acquire new land and buy
machinery. Over time more farmers will
shift to tomatoes if profitable
