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Economics 205Principles of
Fall '97
Microeconomics  R. Larry Reynolds
 Elasticity
· Elasticity is a concept borrowed from physics
· Elasticity is a measure of how responsive a
dependent variable is to a small change in an
independent variable(s)
· Elasticity is defined as a ratio of the percentage
change in the dependent variable to the
percentage change in the independent variable
· Elasticity can be computed for any two related
variables

Economics 205Principles of
Fall '97 Slide 2
Microeconomics
 Elasticity [cont. . . ]
· Elasticity can be computed to show the effects of:
· a change in price on the quantity demanded [ “a change in
quantity demanded” is a movement on a demand function]
· a change in income on the demand function for a good
· a change in the price of a related good on the demand
function for a good
· a change in the price on the quantity supplied
· a change of any independent variable on a dependent
variable

Economics 205Principles of
Fall '97 Slide 3
Microeconomics
 “Own” Price Elasticity
· Sometimes called “price elasticity”
· can be computed at a point on a demand
function or as an average [arc] between two
points on a demand function

· ep, η , ε are common symbols used to

represent price elasticity
· Price elasticity [ep] is related to revenue
· “How will a change in price effect the total
revenue?” is an important question.

Economics 205Principles of
Fall '97 Slide 4
Microeconomics
 Elasticity as a measure of
responsiveness
· The “law of demand” tells us that as the
price of a good increases the quantity that
will be bought decreases but does not tell
us by how much.
· ep [“own”price elasticity] is a measure of
that information]
· “If you change price by 5%, by what
percent will the quantity purchased
change?
Economics 205Principles of
Fall '97 Slide 5
Microeconomics
 % changein quantitydemanded
e p
≡
% changein price
% ∆ Q At a point on a demand function this can be
or, ep ≡ calculated by:
%∆ P
QQ
2 - Q1 = ∆
2 - Q1
Q∆ Q
Q1 Q1
ep = =
P2 -P2P-1 =P1∆ P ∆ P
P1 P1

Economics 205Principles of
Fall '97 Slide 6
Microeconomics
 ∆+2Q
[2/3 = .66667]
31
ep =
Q % ∆ Q = 67%
∆-2 P =
% ∆ P = -28.5%
= -2.3 [rounded]

P7 [-2/7=-.28571] The “own” price elasticity of demand

1
at a price of $7 is -2.3
Price decreases from $7 to $5
This is “point” price elasticity. It is calculated at a point
Px on a demand function. It is not influenced by the direction
or magnitude of the price change.
A
P1 = $7 P2- P1 = 5 - 7 = ∆ P = -2
∆ P=
B Q2 - Q1 = 5 - 3 = ∆ Q = +2
P2 = $5 -2 There is a problem! If the
price changes from $5 to
D $7 the coefficient of
∆ Q = +2 elasticity is different!

Q1 = 3 Q2 = 5 Qx/ut
Economics 205Principles of
Fall '97 Slide 7
. Microeconomics
 ∆ -2Q [-2/5 = -.4]
% ∆ Q = -40%
ep = 5Q1 =
% ∆ P = 40%
= -1 [this is called “unitary elasticity]
∆+2P
P51 [+2/5 = .4]
When the price increases from $5 to $7, the ep = -1 [“unitary”]
In the previous slide, when the price decreased from $7 to $5, ep = -2.3

The point price elasticity is Px

different at every point! ep = -2.3
A
P2 = $7 ep = -1
∆ P = +2 B
There is an P1 = $5
easier way!
D
∆ Q = -2
Q2= 3 Q1= 5 Qx/ut
Economics 205Principles of
Fall '97 Slide 8
Microeconomics
 An easier way! By rearranging terms
∆ Q this is a point on
∆ Q P1 ∆ Q P1 the demand
ep = Q1
∆ QP1
=
Q1 * ∆ P
=
∆ P
* function
Q1
P1 this is the
slope of the
Given that when: demand function
P1 = $7, Q1 = 3
∆ Q P71
P2 = $5, Q2= 5 ep = -1
∆ P
* Q
31
= -2.33
P2- P1 = 5 - 7 = ∆ P = -2
P1 = $7, Q1 = 3
Q2 - Q1 = 5 - 3 = ∆ Q = +2
On linear demand functions the
Then, slope remains constant so you
∆ Q +2 just put in P and Q
= = -1
∆ P -2
This is the slope of the demand Q = f(P)
Economics 205Principles of
Fall '97 Slide 9
Microeconomics
The following information was Px Q = f (P)
given
P1 = $7, Q1 = 3 A
$7
P2 = $5, Q2= 5 What is the Q
B intercept?
$5
Q2 - Q1 = 5 - 3 = ∆ Q = +2
P2- P1 = 5 - 7 = ∆ P = -2 Px must decrease
The slope of the demand function
by 5. D
Q increases by 5
[Q = f(P)] is ∆ Q +2
= = -1 x/ut
Q = 10
∆ P -2
3 5 Q
The slope [-1] indicates that for every
1 unit increase in Q, Px will decrease by 1.
Since Px must decrease by 5, Q must
The equation for the demand increase by 5
function we have been using is Q = 10 when Px = 0
Q = 10 - 1P. A table can be The slope-intercept form
constructed. Q = a10+ -m1 P

Economics 205Principles of
Fall '97 Slide 10
Microeconomics
 using our formula,
The slope is -1 The intercept is 10
∆ Q P1
ep =
∆ P * Q1
For a simple demand function: Q = 10 - 1P
price quantity ep Total
Revenue the slope is -1, price is 7
0 ∆ Q P71
ep = (-1) * Q31 = -2.3
$0 10

$1 9 -.11 ∆ P
$2 8 -.25 at a price of $7, Q = 3
$3 7 -.43
$4 6 -.67 Calculate ep at P = $9
$5 5 -1. Q=1 9
ep = (-1) = -9
$6 4 -1.5 1
$7 3 -2.3 Calculate ep for all other
$8 2 -4. price and quantity
$9 1 -9 combinations.
$10 0 undefined
Economics 205Principles of
Fall '97 Slide 11
Microeconomics
 Notice that at higher prices
the absolute value of the price
For a simple demand function: Q = 10 - 1P elasticity of demand, ep, is
greater.
price quantity ep Total
Revenue
Total revenue is price times
$0 10 0 0 quantity; TR = PQ.
$1 9 -.11 9 Where the total revenue [TR]
16 is a maximum, ep  is equal
$2 8 -.25
to 1
$3 7 -.43 21
In the range where ep < 1, [less
$4 6 -.67 24
than 1 or “inelastic”], TR increases as
$5 5 -1. 25 price increases, TR decreases as P
$6 4 -1.5 24 decreases.
$7 3 -2.3 21 In the range where ep > 1,
$8 2 -4. 16 [greater than 1 or “elastic”], TR
$9 1 -9 9 decreases as price increases, TR
$10 0 undefined 0 increases as P decreases.
Economics 205Principles of
Fall '97 Slide 12
Microeconomics
 To solve the problem of a point elasticity that is different for every price quantity
combination on a demand function, an arc price elasticity can be used. This arc price
elasticity is an average or midpoint elasticity between any two prices. Typically,
the two points selected would be representative of the usual range of prices in the
time frame under consideration.
The formula to calculate the average or arc price
P1 + P2 = elasticity is: ∆ Q P1 + P2
12 ep = * Q1 + Q2
∆ P
P1 = $7, Q1 = 3 Px The average or arc ep between
Q1 + Q2
P2 = $5, Q2= 5 $5 and $7 is calculated,
= 8
A
Q2 - Q1 = 5 - 3 = ∆ Q = +2 $7
Slope of demand
P2- P1 = 5 - 7 = ∆ P = -2 ∆ Q
B = - 1
$5 ∆ P

∆ Q P1 12
+ P2 D
ep = -1
* = - 1.5
∆ P Q1 8+ Q2
The average ep between $5 and $7 is -1.5 3 5 Qx/ut
Economics 205Principles of
Fall '97 Slide 13
Microeconomics
 Given: Q = 120 - 4 P Calculate the point ep at each
price on the table.
Price Quantity
e p TR
Calculate the TR at each price
on the table.
$ 10
Calculate arc ep at between
$ 20 $10 and $20.
$ 25 Calculate arc ep at between
$ 28 $25 and $28.

Calculate arc ep at between $20 and $28.

Graph the demand function [labeling all axis and functions], identify
which ranges on the demand function are price elastic and which are
price inelastic.

Economics 205Principles of
Fall '97 Slide 14
Microeconomics
 Given: Q = 120 - 4 P Calculate the point ep at each
price on the table.
Price Quantity ep TR
Calculate the TR at each price
on the table. TR = PQ
$ 10 80 -.5 $800
Calculate arc ep at between
$ 20 40 -2 $800
$10 and $20. ep = -1
$ 25 20 -5 $500
Calculate arc ep at between
$ 28 8 -14 $224 $25 and $28. ep = -7.6
Calculate arc ep at between $20 and $28. ep = -4
Graph the demand function [labeling all axis and functions], identify
which ranges on the demand function are price elastic and which are
price inelastic. At what price will TR by maximized?
P = $15

Economics 205Principles of
Fall '97 Slide 15
Microeconomics
Graphing Q = 120 - 4 P, Price TR is a maximum
where ep is -1 or TR’s
slope = 0
When ep is -1 TR is a maximum. The top “half” of the demand
When | ep | > 1 [elastic], TR and P function is elastic.
TR
move in opposite directions. (P has | ep | > 1 [elastic]
a negative slope, TR a positive slope.) 30

When | ep | < 1 [inelastic], TR and P ep = -1

move in the same direction. (P and TR 15 | ep | < 1
both have a negative slope.) inelastic
Arc or average ep is the average
elasticity between two point [or prices]
60 120 Q/ut
point ep is the elasticity at a point or price.
The bottom “half” of the demand
Price elasticity of demand describes function is inelastic.
how responsive buyers are to change
in the price of the good. The more “elastic,” the more responsive to ∆ P.

Economics 205Principles of
Fall '97 Slide 16
Microeconomics
 Use of Price Elasticity
· Ruffin and Gregory [Principles of Economics, Addison-
Wesley, 1997, p 101] report that:
· short run | ep| of gasoline is = .15 (inelastic)
· long run | ep| of gasoline is = .78 (inelastic)
· short run | ep| of electricity is = . 13 (inelastic)
· long run | ep| of electricity is = 1.89 (elastic)
· Why is the long run elasticity greater than short
run?
· What are the determinants of elasticity?
Economics 205Principles of
Fall '97 Slide 17
Microeconomics
 Determinants of Price
Elasticity
· Availability of substitutes [greater availability of
substitutes makes a good relatively more elastic]
· Portion of the expenditures on the good to the
total budget [lower portion tends to increase
relative elasticity]
· Time to adjust to the price changes [longer time
period means there are more adjustment possible
and increases relative elasticity
· Price elasticity for “brands” is tends to be more
elastic than for the category of goods
Economics 205Principles of
Fall '97 Slide 18
Microeconomics
 An application of price elasticity.
The price elasticity of demand for milk is estimated between -.35 and -.5.
Using -.5 as a reasonable figure, there are several important observations that
can be made.
%∆ Q
What effect does a
Since ep = -.5 ep ≡
10% increase in the Pmilk %∆ P
have on the quantity that
individuals are willing to buy?
To solve for % ∆ Q
%∆ Q
Multiply both sides by +10% -5%(-.5
(+10%)x e = ∆ Q x (+10%)
= p ≡) %
A 10% increase in the price of milk would % ∆+10%
P
reduce the quantity demanded by about Pmilk
5%.
P2
If price were decreased by 5%, what +10%
P1
would be the effect on quantity Dmilk
demanded? A 10% increase -5%
in P reduces Q
Fall '97 by 5%
Economics 205Principles of
Q2 Q1 Q
Slide 19 milk
Microeconomics
 %∆ Q
ep ≡ The price elasticity of demand is a measure of
%∆ P the % ∆ Q that will be “caused” by a % ∆ P.

If the price elasticity of demand for air travel was estimated at -2.5, what
effect would a 5% decrease in price have on quantity demanded ?
%∆ Q
-2.5 = = +12.5% change in quantity demanded
%- ∆
5% P

If the price elasticity of demand for wine was estimated at -.8, what
effect would a 6% increase in price have on quantity demanded ?

%∆ Q
-.8 = = -4.8% decrease in quantity demanded
% +6%
∆ P

Economics 205Principles of
Fall '97 Slide 20
Microeconomics
 If the price elasticity of demand for milk were -.5, the effects
of a price change on total revenue [TR] can also be estimated.
Since , When | ep| < 1, demand is “inelastic. “ This means that
%∆ Q the  % ∆ Q <  % ∆ P . Since the % price
ep ≡ %∆ P
decrease is greater than the % increase in Q,
TR [TR = PQ] will decrease.
When | ep|
< 1, a price decrease will decrease TR; a price increase will
increase TR, Price and TR “move in the same direction.” [inelastic demand
with respect to price]

When | ep| > 1, demand is “elastic.” This means that the  % ∆ Q >  % ∆ P .
When the % price decrease is less than the % increase in Q,
TR [TR = PQ] will increase.
When | ep|
> 1, a price decrease will increase TR; a price increase will
decrease TR, price and TR “move in opposite directions.” [elastic demand
wrt price]

Economics 205Principles of
Fall '97 Slide 21
Microeconomics
 TR
Graphically this can be shown Price and
TR is a maximum
TR move in
TR = PQ, so the maximum TR is the opposite
rectangle 0Q1 EP1 directions

As price rises into the elastic range

the TR will decrease. Notice that
in this range the slope of demand TR
is negative, the slope of TR is P
elastic
positive
P2 at the midpoint, ep = -1
price rises +TR

(P2 Q2) is less

E
P1
than
Loss in
(P
TR1 Q1)
when
∆P D
0 Q2 Q1 Q/ut
Economics 205Principles of
Fall '97 Slide 22
Microeconomics
 TR
When price elasticity of demand is TR is a maximum
inelastic

A price decrease will result in

a decrease in TR [PQ]. notice that
both TR and Demand have a
negative slope in the inelastic
range of the demand function. TR
Price and TR “move in the same P
direction.”

A price decrease will reduce at the midpoint, ep = -1

TR; a price increase will E
P1 inelastic
increase TR. Note that
TR = P1 Q1
this information is useful P0 [Maximum]
but does not provide
results in a smaller PQ D
[TR]
information about profits! 0 Q0
Q1 Q/ut
Economics 205Principles of
Fall '97 Slide 23
Microeconomics
 “Own” Price Elasticity of
Demand
· ep is a measure of the responsiveness of buyers to changes
in the price of the good.
· ep will be negative because the demand function is
negatively sloped.
· A linear demand function will have unitary elasticity at its
“midpoint.” AT THIS POINT TR IS A MAXIMUM!
· A linear demand function will be more “elastic” at higher
prices and tends to be more “inelastic” in the lower price
ranges

Economics 205Principles of
Fall '97 Slide 24
Microeconomics
 Elastic ep
· When | ep| > 1 [greater than 1], the demand is “elastic”
• | %∆ Q| > | %∆ P| , this shows buyers are responsive to changes
in price
· An increase in the price of the good results in a decrease in total
revenue [TR], a decrease in the price increases TR. Price and TR
move in opposite directions.
· The demand for a good tends to become more elastic
· as the number of substitutes increases
· “luxury” good more elastic than “necessities”
· % of price [or expenditure on the good] of the budget
· as the amount of time for adjustments increases elasticity

Economics 205Principles of
Fall '97 Slide 25
Microeconomics
 Inelastic ep
· When | ep| < 1 [less than 1] the demand is
“inelastic”
· The | %∆ Q| < | %∆ P| , buyers are not
very responsive to changes in price.
· An increase in the price of the good results
in an increase in total revenue [TR], a
decrease in the price decreases TR. Price
and TR move in the same direction

Economics 205Principles of
Fall '97 Slide 26
Microeconomics
 P D2
D1 is a “perfectly elastic” perfectly
demand function. inelastic
For an infinitesimally small ep = 0
change in price, Q changes
by infinity. Buyers are very perfectly elastic
responsive to price changes. An | ep| = undefined D1
infinitely small change in price As the dem
changes Q by infinity. and functio
horizontal,
to price ch
[buyers are
n becomes
mo r
more
e responsiv
De
anges],| ep e
| approache
s infinity.
∞0 Q
%∆
ep ≡ ==undefined
0∞
%∆ P
P 0 Q/ut
D2 is a “perfectly inelastic” demand function, no matter how
much the price changes the same amount is bought. Buyers
are not responsive to price changes! | ep| = 0, perfectly inelastic.
Economics 205Principles of
Fall '97 Slide 27
.
. Microeconomics
 Examples
· Goods that are relatively price elastic
· lamb, restaurant meals, china/glassware,
jewelry, air travel [LR], new cars, Fords
· in the long run, | ep| tends to be greater
· Goods that are relatively price inelastic
· electricity, gasoline, eggs, medical care, shoes,
milk
· in the short run, | ep| tends to be less

Economics 205Principles of
Fall '97 Slide 28
Microeconomics
 Income Elasticity
[normal goods]

Income elasticity is a measure of the change in

demand [a “shift” of the demand function] that is
% ∆ Qx “caused” by a change in income.
ey ≡ The increase in income, ∆ Y, increases demand
% ∆ Y to D2. The increase in demand results in a
[Where Y = income] larger quantity being purchased at the
same Price [P1]..
At a price of P1 , the quantity demanded
given the demand D is Q1 .D is the P Due to increase
demand function when the income is Y1 . in income,
For a “normal good” an increase demand
increases
in income to Y2 will “shift” the
demand to the right. This is an P1 D2
increase in demand to D2.
% ∆ Y > 0; % ∆ Q> 0; therefore,
D
ey >0 [it is positive]
Q1 Q2 Q/ut
Economics 205Principles of
Fall '97 Slide 29
. Microeconomics
Income Elasticity [continued. . .]
[normal goods]

A decrease in income is associated with a decrease in

% ∆ Qx
ey ≡ the demand for a normal good.
%∆ Y
For a decrease in income [-∆ Y],
At income Y1, the demand D1 represents the demand decreases; i.e. shifts
the relationship between P and Q. At to the left, at the price [P1 ], a
a price [P1] the quantity [Q1] is smaller Q2 will be purchased.
demanded.
P
A decrease in income,
% ∆ Y < 0 [negative]; % ∆ Q < 0 [negative]; decreases
so, ep > 0 [ positive] demand
P1
For either an increase or decrease in income
the ep is positive. A positive relationship D1
[positive correlation] between ∆ Y and ∆ Q D2
is evidence of a normal good.
Q2 Q1 Q/ut
Economics 205Principles of
Fall '97 Slide 30
Microeconomics
 When income elasticity is positive, the good is considered a “normal
good.” An increase in income is correlated with an increase in the
demand function. A decrease in income is associated with a
decrease in the demand function. For both increases
and decreases in

e
The greater the value of y,
income, ey is positive
+-
%%∆% QxxQx
eyy ≡
Q
∆ ∆
the more responsive buyers +
are to a change in their incomes. %∆ Y
+- %%∆ ∆ Y Y
When the value of ey is greater than 1, it is called a “superior good.”
The |% ∆ Qx| is greater than the |% ∆ Y|.
% ∆ Qx
Buyers are very responsive to changes in
income. Sometimes “superior goods” are
ey ≡
%∆ Y
called “luxury goods.”

Economics 205Principles of
. Fall '97
. Microeconomics
Slide 31
Income Elasticity
[inferior goods]

There is another classification of goods where changes in income

shift the demand function in the “opposite” direction.
An increase in income [+∆ Y] reduces demand.
-
% ∆ Qx
An increase in income reduces e-e
y y≡= %∆ Qx
%+∆
∆ YY
the amount that individuals P
are willing to buy at each price
of the good. Income elasticity
decreases
is negative: - ey demand
P1
The greater the absolute value
of - ey, the more responsive buyers D1
- %∆ Q x
D2
are to changes in income

Q2 Q1 Q/ut
. Economics 205Principles of
Fall '97 Slide 32
. Microeconomics
Income Elasticity
[inferior goods]

Decreases in income increase the demand for inferior goods.

A decrease in income [-∆ Y] increases demand.

+%∆
% ∆ Q
Q
A decrease in income [-∆ Y]
- eeyy ≡
xx
results in an increase in demand, P
%∆ Y
the income elasticity of demand -∆ Y
is negative

For both increases and decreases in

P1 D2
income the income elasticity is negative
for inferior goods. The greater the D1
absolute value of ey, the more responsive
+%∆ Q x

buyers are to changes in income

Q1 Q2 Q/ut
Economics 205Principles of
. . Fall '97 Slide 33
Microeconomics
 Income Elasticity
· Income elasticity [ey] is a measure of the effect
of an income change on demand. [Can be calculated as
point or arc.]

· ey > 0, [positive] is a normal or superior good

an increase in income increases demand, a
decrease in income decreases demand.
· 0< ey < 1 is a normal good
· 1 < ey is a superior good

· ey < 0, [negative] is an inferior good

Economics 205Principles of
Fall '97 Slide 34
Microeconomics
 Examples of ey
· normal goods, [0 < ey < 1 ], (between 0 and 1)
· coffee, beef, Coca-Cola, food, Physicians’
services, hamburgers, . . .
· Superior goods, [ ey > 1], (greater than 1)
· movie tickets, foreign travel, wine, new cars, . . .
· Inferior goods, [ey < 0], (negative)
· flour, lard, beans, rolled oats, . . .

Economics 205Principles of
Fall '97 Slide 35
Microeconomics
 Cross-Price Elasticity
· Cross-price elasticity [exy] is a measure of how
responsive the demand for a good is to changes in
the prices of related goods.
· Given a change in the price of good Y [Py ], what is
the effect on the demand for good X [Qy ]?
· exy is defined as:
% ∆Q
e xy
≡
% ∆ Py
x

Economics 205Principles of
Fall '97 Slide 36
Microeconomics
Cross-price elasticity of demand , [exy]
[substitutes]

When the price of pork increases, it will tend to increase the demand
for beef. People will substitute beef, which is relatively cheaper, for
pork, which is relatively more expensive.

When beef is $2, Qb beef

[price of pork]

[price of beef]
When pork is $1.50, Qp pork
is purchased. Pb is purchased.
Pp price of pork increases at Pb = $2 more
increase beef will be bought
The quantity demanded
demand to substitute for
2 of pork decreases.
2 the smaller
for an increase quantity of
1.50
in Ppork, pork.
Dp
demand for
beef increases
Db Db ’
-∆ Qp

Qb’ beef/ut
Qp’ Qp pork/ut Qb
Economics 205Principles of
Fall '97 Slide 37
. Microeconomics
 Cross-price elasticity
· In the case of beef and pork
· the ebp is not the same as epb
· ebp is the % change in the demand for beef
with respect to a % change in the price of pork
· epb is the % change in the demand for pork with
respect to a % change in the price of beef
· beef may not be a good substitute for pork
· pork may not be a good substitute for beef

Economics 205Principles of
Fall '97 Slide 38
Microeconomics
Cross-price elasticity of demand , [exy]
[substitutes]

The cross elasticity of the demand for beef with respect to the
price of pork, ebeef-pork or ebp can be calculated:
+ ∆QQofb beef
%∆ An increase in the price of pork,
+ebp
ebp = “causes” an increase in the demand
positive %∆ +P of
∆ Ppork
p for beef.
cross elasticity is positive

%∆ -Q∆of
Qbeef
b A decrease in the price of pork,
+eebpbp = “causes” a decrease in the demand
positive %∆ P of pork for beef.
- ∆ Pp
If goods are substitutes, exy will be positive. The greater the
coefficient, the more likely they are good substitutes.

Economics 205Principles of
Fall '97 Slide 39
Microeconomics
Cross-price elasticity of demand , [exy]
[compliments]
as more crayons are
purchased, the
demand for colour
Pc a decrease in the price
Pc books increases.
increase
of crayons, demand At the same
P1 price a larger
$3 quantity will
-∆ Pc Dp be bought
Po
Dc Dc’
Q1 Q2 crayons 2000 2500 colour books
increases the quantity demanded +∆ Qb
of crayons
for compliments, the cross
- ebc QQ
%∆+ ∆ ofbb
ebc =
negative
elasticity is negative for price
increase or decrease.
-
%∆ P of c
∆ Pc

Economics 205Principles of
Fall '97 Slide 40
Microeconomics
 Cross-Price Elasticity
· exy > 0 suggests substitutes, the
[positive],
higher the coefficient the better the
substitute
· exy < 0 [negative],
suggests the goods are
compliments, the greater the absolute value
the more complimentary the goods are
· exy = 0, suggests the goods are not related
· exy can be used to define markets in legal
proceedings

Economics 205Principles of
Fall '97 Slide 41
Microeconomics
 Elasticity of Supply

· Elasticity of supply is a measure of

how responsive sellers are to changes
in the price of the good.
· Elasticity of supply [ep] is defined:
% ∆ Quantity Supplied
e s
=
% ∆ price
Economics 205Principles of
Fall '97 Slide 42
Microeconomics
Elasticity of supply
%∆ Qsupplied
es =
%∆ P
Given a supply function, at a price [P1], Q1 is produced and offered
for sale.
P At a higher price [P2], a larger
p ly quantity, Q2, will be produced
p
su and offered for sale.

P2 The increase in price [ ∆ P ], induces

+∆ P a larger quantity goods [ ∆ Q]for
P1 sale.
The more responsive sellers are to

+∆ Q ∆ P, the greater the absolute value of es.

[The supply function is “flatter”or
Q1 Q2 Q /ut more elastic]

Economics 205Principles of
Fall '97 Slide 43
Microeconomics
The supply function is a P
model of sellers behavior.
Si a perfectly inelastic
supply, es = 0
l es
Sellers behavior is influenced by: a p p r s horizonta
oa c h e
as s u p ply
1. technology p ro a c h e s infinity
ap Se
2. prices of inputs
a perfectly
3. time for adjustment elastic supply
market period
short run
[es is undefined.]
long run
very long run
Q /ut
4. expectations
5. anything that influences costs of production
taxes
regulations, . . .

Economics 205Principles of
Fall '97 Slide 44
Microeconomics
 Elasticity
· Price elasticity of demand [measures a move on a demand
function caused by change in price/arc or point]
· elastic, inelastic or unitary elasticity
· income elasticity [measures a shift of a demand function
associated with a change in income]
· superior, normal, and inferior

· cross elasticity
· measure the shift of a demand function for a good associated
with the change in the price of a related good
· [compliment/substitute]
· price elasticity of supply [measures move on a supply curve]

Economics 205Principles of
Fall '97 Slide 45
Microeconomics