BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Lec02b Elasticity and its Applications

By the end of this chapter, students should understand:
the meaning of the elasticity of demand.
what determines the elasticity of demand.
the meaning of the elasticity of supply.
what determines the elasticity of supply.
the concept of elasticity in three very different markets (the market for wheat, the market for oil,
and the market for illegal drugs).
Elasticity: a measure of the responsiveness of Qd or Qs to one of its determinants.
Price elasticity of demand:
A measure of how much Qd of a good responds to a change in P,

Price elasticity of demand =

% change in quantity demanded

% change in price

Example: P of ice cream 10% and Qd 20%.

Price elasticity of demand =__________
The Midpoint Method

Price elasticity of demand =

(Q2 - Q1) /[(Q1 Q2) / 2]

(P 2 - P 1) /[(P 1 P 2) / 2]

Example: P from $4 to $6 and Qd from 120 to 80.

% change in price = _____%
% change in quantity demanded = _____%
Price elasticity of demand = _______
Determinants:
Determinants
a) Availability of Close Substitutes

Explanations
The more substitutes a good has, the _____
elastic its demand.

b) Necessities versus Luxuries

c) Definition of the market

Necessities are more price _________

________ defined markets (ice cream) have
more elastic demand than _________ defined
markets (food).
goods tend to have more elastic demand over
__________ time horizons

d) Time Horizon

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Elasticity from Point A to B (When price ):

( )
( )
.

=
=
=
( )
( )
.

Elasticity from Point B to A (When price ):

( )
( )
.

=
=
=
( )
( )
.

The elasticity from A to B, and B to A are

different To avoid this contradict result, using
Mid-point formula as below
Using Mid-point formula
Elasticity from Point A to B (When price ):
( )
( )
.
( + )
( + )
=
=
=
( )
( )
.
( + )
( + )
Elasticity from Point B to A (When price ):
( )
( )
( + )
( + ) .
=
=
=
( )
( )
.
( + )
( + )
Example:

a) Compute price elasticity of demand when

1) P drops from 5 to 2.5
( )

=
( )

2) P increases from 2.5 to 5

( )

=
( )

b) Using midpoint method, compute price

elasticity of demand when
1) P drops from 5 to 2.5

Do the calculations of price elasticity of

demand (part a) deviate? Why? How to
solve?

( )
( + )
=
( )
( + )
2) P increases from 2.5 to 5
( )
( + )
=
( )
( + )

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Variety of Demand Curves

a) Perfectly Inelastic: p = _______

e) Perfectly Elastic: p = _______

Qd _________respond to P changes.

Qd changes _______ with any change in P.

b) Inelastic Demand: p = _______

d) Elastic Demand: p = _______

Qd does not respond _______ to P changes.

When %P = 22%, %Q = ____%.

Qd responds _______ to P changes.

When %P = 22%, %Q = ____%.

c) Unit Elastic: p = _______

Qd changes by the ____ percentage as the
P.

TSH

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Activity Ranking Elasticities

Purpose
The intent of this exercise is to get students to think about varying degrees of
elasticity and the factors that determine demand elasticity.
Instructions
RANK from most to least elastic.
1. beef
2. salt
3. European vacation
4. steak
5. new Honda Accord
HINT: think of the Determinants

Total Revenue and the Price Elasticity of Demand

Total revenue: the amount paid by buyers and received by sellers of a good, P * Q
P
100
TR = P*Q

TSH

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BEC1034

Lec02b Examples

Elasticity

Trimester 3, 2014/2015

When P increases from RM1 to RM3

Demand Curve is INELASTIC

When P increases from RM1 to

RM3;
Total Revenue ________ from
_______ to ___________

When P increases from RM4 to RM5

Demand Curve is ELASTIC

When P increases from RM4 to

RM5;
Total Revenue ________ from
_______ to ___________

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Elasticity and Total Revenue along a Linear Demand Curve

When demand is Elastic: P TR ______

When demand is Inelastic: P TR ______

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Other Elasticities

Elasticity
Income elasticity of
demand
= how much the Qd of a
good responds to a
change in consumers
_____

Example
Johns income rises from $20,000
to $22,000 and the quantity of
hamburger he buys each week
falls from 2 pounds to 1 pound.

Remarks

%Qd=
%Y=
Income elasticity=

Inferior goods:
NEGATIVE
Y, Qd____

Cross-price elasticity of
demand
= how much the Qd of
one good responds to a
change in the P of another
good
= %Qdx/_______

The price of apples rises from

$1.00 per pound to $1.50 per
pound. As a result, the quantity
of oranges demanded rises from
8,000 per week to 9,500.

Substitute:
POSITIVE
Pz, Qdx____

Price elasticity of
Supply
=how much the
_______of a good
responds to a change in
the P of that good

The price of milk increases from

$2.85 per gallon to $3.15 per
gallon and the quantity supplied
rises from 9,000 to 11,000
gallons per month

= %Qd/______

=%QS/%P

%Qdx=
%Pz=
Cross-price elasticity=

%Qs=
%P=
price elasticity of supply=

Normal goods:
POSITIVE
Y, Qd____

Complements:
NEGATIVE
Pz, Qdx____
Determinants:
1) Flexibility of
sellers: ability to
change the
amount of good
produced
Eg: which are
inelastic, which are
elastic?
beach-front land;
books; cars
2) Time horizon:
e.g which will have
more elastic curve?
Short run; Long Run

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Variety of Supply Curves

a) Perfectly Inelastic Ss: = _______

e) Perfectly Elastic Ss: = _______

Qs _________respond to P changes.

Qs changes _______ with any change in P.

b) Inelastic Ss: = _______

d) Elastic Ss: = _______

Qs does not respond _______ to P changes.

When %P = 22%, %Qs = ____%.

Qs responds _______ to P changes.

When %P = 22%, %Qs = ____%.

c) Unit Elastic: = _______

Qs changes by the ____ percentage as the
P.

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

Three Applications of Supply, Demand, and Elasticity

1.
2.
3.

Examine whether the supply or demand curve shifts.

Determine the direction of the shift of the curve.
Use the supply-and-demand diagram to see how the market equilibrium changes.

A. Can Good News for Farming Be Bad News for Farmers?

A new hybrid of wheat is developed that is more productive than those used in the past.
What happens?
More productive ______ shift right
1) Ss ____, P _____, Qd _______
2) Dd INELASTIC %P ____ % Qd TR ___
3) Dd ELASTIC %P ____ % Qd TR ___
In this case, Price Elasticity of Demand = _______
Hence, when P TR ______ _____ news to
farmer

B. Why Did OPEC Fail to Keep the Price of Oil High?

In the 1970s and 1980s, OPEC the amount of oil it was willing to supply to world markets. The in
Ss led to an P of oil and a in QD. The P was much larger in the short run than the long run.
Why?
Short Run

Long Run

In Long Run..
The Dd is ______elastic consumers can adjust to the higher price of oil by carpooling or buying a
vehicle that gets better mileage.
The Ss is ______ elastic because non-OPEC producers will respond to the higher price of oil by
producing more.

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BEC1034

Lec02b Examples

Trimester 3, 2014/2015

C. Does Drug Interdiction Increase or Decrease Drug-Related Crime?

The federal government increases the number of federal agents devoted to
the war on drugs. What happens?

What happens if the government instead pursued a policy of drug education?

Ss drugs _____ P _______, Qd ________

Dd drugs _____ P _______, Qs ________ TR ________

a) Demand is inelastic P TR ______

b) Demand is elastic P TR ______
Demand for drugs is ________ drug-related crime may rise.

Drug education should not increase drug-related crime

TSH

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