Q
d
Exploring Elasticity
Ed = Avg
%
+
00
QS
3P
Avg
=1
=Q
(P)
Qu
an t
ity
%
Dem
and
Pri
A
ce B
It’s a fact…
AND…
the demand for
different products will
respond differently to
changes in price.
the supply of different
products will respond
differently to changes
in price.
Elasticity measures
a curve’s
responsiveness to
some factor…
Price Elasticity of Supply (Point)
Supply Curve
10
= 0.5
20
35
30
Price
25
20
Supply
15
10
5
0
0
5
10
15
20
25
30
35
Quantity
such as price!
Es =
%
Quantity Supplied
%
Price
10
= 0.5
20
= 1.0
Thus, the
elasticity of
Supply is 1.
Otherwise known
as “unitary”
Elasticity.
1
Price Elasticity of Supply (Point)
10
= 0.5
20
35
30
Price
25
20
Supply
15
10
0
5
10
15
20
25
30
35
Quantity
%
Es =
Quantity Supplied
%
Supply Curve
Price
30
= 1.0
25
20
Supply
15
10
0
0
5
Otherwise known
as “unitary”
Elasticity.
10
= 0.33
30
30
Price
25
20
Supply
15
10
0
5
10
15
20
25
30
35
Quantity
%
Es =
Quantity Supplied
%
Price
30
Price
25
20
Supply
15
10
5
0
0
5
10
15
20
25
30
35
Quantity
Es =
Avg %
Quantity Supplied
Avg %
5
= 0.22
22.5
30
35
%
Es =
Quantity Supplied
%
Price
Supply Curve
This would be
considered
“elastic.”
10
= 0.40
25
30
= 1.65
This would still
be considered
quite “elastic.”
10
= 0.40
25
35
25
35
Price Elasticity of Supply (ARC)
Supply Curve
20
= 2.0
Price Elasticity of Supply (ARC)
Thus, the
elasticity of
Supply is 1.65
5
0
5
= 0.20
25
15
Quantity
25
Price
Supply Curve
10
5
= 0.25
20
Thus, the
elasticity of
Supply is 2.
5
Price Elasticity of Supply (Point)
35
10
= 0.50
20
35
Thus, the
elasticity of
Supply is 1.
5
0
10
= 0.5
20
Price Elasticity of Supply (Point)
Price
Supply Curve
20
Supply
15
10
5
0
0
5
10
15
20
25
30
35
Quantity
Es =
Avg %
Quantity Supplied
Avg %
Price
5
= 0.22
22.5
= 1.82
Thus, the
elasticity of
Supply is 1.82
This would still
be considered
quite “elastic.”
Elasticity Coefficients
Elastic: greater than 1
= 1.82
Thus, the
elasticity of
Supply is still 1.82
Inelastic: less than 1
Unitary: 1
Perfectly inelastic: ∞
Perfectly elastic: 0
Yes, this is still
quite “elastic.”
Price
2
Extreme Elasticities:
Extreme Elasticities:
Perfectly Inelastic (Supply)
Perfectly Elastic (Supply)
S
50
Price
40
30
20
10
0
0
10
20
30
40
50
60
Quantity
Perfectly inelastic supply
represents a situation wherein the
quantity supplied is fixed,
regardless of price. A good
example would be land (for all
purposes, real estate, agriculture,
etc). The supply of land is fixed,
regardless of price.
Such an elasticity will result in a 0% change in quantity in
response to any change in price. Zero divided by any number is
zero, so the elasticity coefficient will be zero (0).
50
40
S
30
20
10
0
0
10
20
30
40
Price Elasticity of Demand (ARC)
Demand Curve
price drops, producer can just store the product and wait for the price to rise.
product? Example, beef and hides. Supply of a minor joint product will be inelastic,
because the price of that joint product won’t influence the supply, whereas the price
of the major joint product will influence supply. Minor joint product = inelastic
30
25
20
= 1.33
15
20
15
10
0
0
5
Ed =
15
20
25
30
Avg %
Quantity Demand
Avg %
Price
Thus, the
elasticity of
demand is -0.17
This is very
“inelastic.”
Extreme Elasticities:
Extreme Elasticities:
Perfectly Elastic (Demand)
40
30
20
10
0
10
20
30
Quantity
40
50
60
Perfectly inelastic demand
represents a situation wherein the
quantity demanded is fixed,
regardless of price. A good
example would be life-saving
medication, wherein a fixed
quantity would be purchased
regardless of price.
Such an elasticity will result in a 0% change in quantity in
response to any change in price. Zero divided by any number is
zero, so the elasticity coefficient will be zero (0).
Perfectly elastic demand
represents a situation wherein the
quantity demanded is infinite at a
particular price, but non-existent
at any other price.
60
50
40
Price
D
= -0.17
35
Perfectly Inelastic (Demand)
50
Price
10
Quantity of Gasoline
The longer suppliers have to respond to price changes, the more likely they will do
so. More time = more elastic supply.
60
This is negative
because the
change in
quantity is
“minus” five
units.
A negative elasticity simply
denotes a “negative”
correlation, such as we would
expect to find on a demand
curve.
5
•  time period (short vs long run): What period of time are we considering?
0
-5
= -0.22
22.5
35
Price of Gasoline
•  production compliments: What else tends to be produced along with the
60
Such an elasticity will result in an infinite change in quantity in
response to a 0% change in price. Any number divided by zero is
undefined, so the elasticity coefficient will be infinite (∞).
•  perishability (storage costs / ability): Easier to store = more elastic. If
More substitutes = more elastic supply, because producers aren’t forced to take a
lower price for one product if that product’s price falls.
50
Quantity
Factors that Influence Price Elasticity of Supply
•  production substitutes: What else can one produce with the same resources?
Perfectly elastic supply
represents a situation wherein
the quantity supplied is infinite
at a particular price, but nonexistent at any other price.
People will often refer to
extreme luxuries as an example
of perfect elasticity, but, in truth,
there are no real examples.
60
Price
60
D
30
20
10
0
0
10
20
30
40
50
60
Quantity
Such an elasticity will result in an
infinite change in quantity in response to
a 0% change in price. Any number
divided by zero is undefined, so the
elasticity coefficient will be infinite (∞).
The demand curve for one
particular firm operating within a
perfectly competitive market is
thought of as being perfectly
elastic, as that firm could sell all
the product it wished at the
market price.
3
Cross Elasticity of Demand (ARC)
Factors that Influence Price
Elasticity of Demand
Price of Apples
30
•  necessity of good / service: more essential = more inelastic
•  availability of substitutes: more substitutes = more elastic
25
20
Supply
15
10
5
•  number of uses: more uses = more inelastic
0
0
•  time period (short vs long run): more time = more elastic
Income Elasticity of Demand (ARC)
Annual Income
($1000.00)
5
= 0.22
22.5
5
10 15
20 25 30 35
Quantity of Oranges
Avg %
Ey =
Quantity Demand
Avg %
Income
In the case of income
elasticity, any positive
correlation at all indicates
a “normal” good, a
positive elasticity greater
than 1 is known as a
“superior” good, but a
negative correlation would
be an “inferior” good.
-10
= -0.66
15
Pricee ($)
30
25
5
= 0.18
27.5
20
15
0
0
5
10
15
20
25
30
35
Quantity
Ed =
Avg %
Quantity Demand
Avg %
Price
35
This would be
considered “elastic.”
Quantity Demand A
IOW, demand for oranges
really increases a lot in
reaction to a small increase
in the price of apples.
Price B
-10
= -0.40
25
5
= 0.22
22.5
5
10 15
20 25 30 35
Quantity
Ey =
Avg %
Quantity Demand
Avg %
Price
This is VERY
elastic!
Thus, the price
elasticity of
demand at this
point on the
curve is -1.82
This is
“elastic.”
If demand is elastic, a decrease
in price will increase total
revenue!
12
= -3.66
Thus, the price
elasticity of
demand at this
point on the
curve is -3.66
= -1.82
Elasticity is actually different across the curve!
Cool Rule #1a:
Monopoly Output Levels
10
5
30
Avg %
0
ela
10
Price / Revenue (Dollars)
Demand Curve
25
35
30
25
20
15
10
5
0
= 1.82
Elasticity is actually different across the curve!
35
20
Demand Curve
Thus, the income elasticity
of demand for oranges is
1.82, which is “elastic.”
0
15
= 1.82
5
= 0.22
22.5
Thus, the cross
elasticity of
demand is 1.82
Elasticity is actually different across the curve!
Price ($)
Income Elasticity
10
Avg %
Ed =
10
= 0.40
25
5
Quantity of Oranges
•  percentage of income spent on item: more $ = more elastic
35
30
25
20
15
10
5
0
10
= 0.40
25
Correlation betw een price of apples and quantity
of oranges purchased.
35
sti
Cool Rule #1b:
c
8
If demand is inelastic, a decrease
in price will decrease total
revenue!
unitary
ine
las
tic
6
Cool Rule #1c:
If demand is unitary, a decrease
in price will not influence total
revenue!
4
2
Cool Rule #2:
0
0
1
2
3
4
5
6
-2
7
8
9
If marginal revenue is positive,
total revenue will increase as
output is increased.
Cool Rule #3:
-4
Output (Units Produced)
If marginal revenue is positive,
then demand must be elastic!
4
To sum up:
• An elastic curve illustrates a high sensitivity (response) to changes in price.
• An inelastic curve illustrates an insensitivity (lack of response) to changes
in price.
• Point Elasticity will reveal different coefficients depending in the direction of
the change in price.
• ARC Elasticity will reveal the same coefficient regardless of the direction of
the price change.
• Income Elasticity will illustrate the impact that a change in income will have
on the demand / supply of a product. (More appropriate to demand.)
• Cross Elasticity will illustrate the impact that a change in the price of one
product will have on the demand / supply of another product.
• If demand is elastic, an increase in price will reduce total revenue.
• If demand is inelastic, an increase in price will increase total revenue.
5