Lesson 4

Course
Introduction to Economics
Chapter 3
Elasticity
Dr. Lê Thanh Hà
Outline
1
The Elasticity of
2
The Elasticity of
Demand Supply
3 4
Applications
Chapter 3: Elasticity Slide 2
Elasticity
Elasticity is a measure of responses of a variable to a change in another

variable.
%∆𝑋
𝐸 𝑋𝑌 =
%∆𝑌

Elasticity
The Price Elasticity of Demand

Elasticity
of The Cross-Price Elasticity of Demand
Demand
The Income Elasticity of Demand
Elasticity
of The Price Elasticity of Supply
Supply

1
ELASTICITY OF DEMAND
A measure of how much the quantity demanded of a good
responds to a change in the price of that good, computed
as the percentage change.
in quantity demanded
The price The percentage change of quantity demanded
divided= by
elasticity of
the percentage
____________________________
demand changeThe percentage
in price change of price
% ∆ 𝑄 𝐷 ∆ 𝑄𝐷 / 𝑄𝐷 ∆ 𝑄𝐷 𝑃
❑
𝐸 = 𝐷𝑃 = = .
%∆ 𝑃 ∆𝑃/𝑃 ∆𝑃 𝑄

Example:
• Oil price increases by 10%
• Quantity demanded for oil decreases by1%
−1 %
❑
𝐸 = 𝐷𝑃 =− 0,1
10 %

Properties
Relative numbers
Negative numbers

Computation Methods
The Midpoint Method
Calculate between two points on a demand curve.
The Point Method

Calculate at one point on a demand curve.

Methods Midpoint Method

Methods Midpoint Method
Midpoint Method:
Q1 – Q2 P1 – P2
EDP =
(Q1 + Q2)/2 (P1 + P2)/2

Method Point
Method
dQ P
E DP  x
dP Q

Method Point
Method
Demand function of a cinema ticket:
70-0,02Q
What is the price elasticity at the price:

30
EDP=0,75. means that at price P=30, 1-percentage

change in price causes quantity demanded to
change by 0.75%.
Types
Unit Elasticity
Inleasticity
Elasticity
|EDP|
0 1 2 3 ∞
Perfect Perfect
Elasticity Inelasticity

Types Perfectly Inelastic Demand
• EDP = 0
• Vertical line.
• Regardless of the
price, the quantity
stays the same.

Types Inelastic Demand
• EDP < 1
• The quantity
moves
proportionately
less than the
price.
• Steep demand
curves.

Type Unit Elastic
Demand
• EDP = 1
• The quantity
moves the same
amount
proportionately as
the price.

Types Elastic
Demand
• EDP > 1
• The quantity
moves
proportionately
less than the
price.
• Flatter demand
curves.

Types Perfectly Elastic
Demand
• EDP = ∞
• Horizontal lines.
• The all quantities
can be sold at one
price.

Determinants
Availability of Close Substitutes
Proportion of Income spent on
Definition of Market
Time Horizon

Elasticity and Total Revenue
Total Revenue (TR) is

equal to price times quantity.

𝑇𝑅 = 𝑃𝑥𝑄

When demand is inelastic, price and

total revenue move in the same
direction.

When demand is elastic, price and

total revenue move in the opposite
direction.
.

When demand is unit elastic, total

revenue remains constant when the
price changes. ∆ 𝑇𝑅 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠
∆
𝑇𝑅 𝑙𝑜𝑠𝑠𝑒𝑠

EDP P increase P decrease
EDP > 1 TR decrease TR increase
EDP = 1 TR not change TR not change
EDP < 1 TR increase TR decrease

Elasticity along a Linear Demand
Curve
• The slope of linear demand curve
is constant.
• The price elasticity of demand
decreases. .

Elasticity along a Linear Demand
Curve

The Cross-Price Elasticity of Demand
This measures how quantity demanded of one good
responds to a change in the price of another good,
ceteris paribus.
Percentage change in quantity of good 1

The cross-price ____________________________
=
elasticity of Percentage change in the price of good 2
demand
% ∆ 𝑄 𝐷𝑥 ∆ 𝑄 𝐷 𝑥 /𝑄 𝐷 𝑥 ∆ 𝑄𝐷 𝑥 𝑃𝑌
❑
𝐸 = 𝑋𝑌 = = x
% ∆ 𝑃𝑌 ∆ 𝑃𝑌 /𝑃 𝑌 ∆ 𝑃𝑌 𝑄 𝐷𝑥

Example:
When the price of orange is 16k/kg and the price of
tangerine is 14k/kg, the quantity demanded of
tangerine is 30 kg. When the price of orange
decreases to 12k/kg, then the quantity demanded
of tangerine is 22 kg. What is the cross-price
elasticity of demand for tangerine?
14
𝐸 𝑄𝐶 =
13

Types
EXY > 0 X and Y are substituted
EXY < 0 X and Y are complement
EXY = 0 X and Y are independent

This measures how the quantity demanded changes
as consumer income changes.
Percentage change in quantity demanded

Income ____________________________
=
elasticity of
demand Percentage change in income
% ∆ 𝑄 𝐷 ∆ 𝑄𝐷 / 𝑄𝐷 ∆ 𝑄𝐷
❑ 𝐼
𝐸 = 𝐷𝐼 = = x
%∆ 𝐼 ∆ 𝐼 /𝐼 ∆𝐼 𝑄𝐷

Types
EDI > 1 Luxuries
0< EDI < 1 Normal goods
EDI < 0 Inferior goods

2
ELASTICITY OF SUPPLY
The price elasticity of supply
It is a measure of how quantity supplied of a good
responds to a change in the price of that good.
Percentage change in quantity supplied

The price
= ____________________________
elasticity of
Percentage change in price
supply
% ∆ 𝑄𝑆 ∆ 𝑄𝑆 / 𝑄𝑆 ∆ 𝑄𝑆 𝑃
❑
𝐸 = 𝑆𝑃 = = x
%∆𝑃 ∆ 𝑃 /𝑃 ∆𝑃 𝑄

Types
Unit Elasticity
Inelastic
Elastic
ESP
0 1 2 3 ∞
Perfect Perfect
Inelasticity Elasticity

Types

Changes
in price
elasticity
along the
supply
curve

Determinants
The input substitution
Time horizon

3
APPLICATIONS
Elasticity
1 Can good news for farming be bad news for

farmers?

Elasticity

Elasticity
2 Which policies are effective to control crime rates?

Elasticity

Elasticity

End

Lesson 4

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Course

Elasticity is a measure of responses of a variable to a change in another

Chapter 3: Elasticity Slide 3

The Price Elasticity of Demand

Chapter 3: Elasticity Slide 4

Chapter 3: Elasticity Slide 6

Chapter 3: Elasticity Slide 7

Chapter 3: Elasticity Slide 8

The Point Method

Chapter 3: Elasticity Slide 9

Chapter 3: Elasticity Slide 10

Chapter 3: Elasticity Slide 11

Chapter 3: Elasticity Slide 12

What is the price elasticity at the price:

EDP=0,75. means that at price P=30, 1-percentage

Chapter 3: Elasticity Slide 14

Chapter 3: Elasticity Slide 15

Chapter 3: Elasticity Slide 16

Chapter 3: Elasticity Slide 17

Chapter 3: Elasticity Slide 18

Chapter 3: Elasticity Slide 19

Availability of Close Substitutes

Proportion of Income spent on

Chapter 3: Elasticity Slide 20

Total Revenue (TR) is

Chapter 3: Elasticity Slide 21

When demand is inelastic, price and

Chapter 3: Elasticity Slide 22

When demand is elastic, price and

Chapter 3: Elasticity Slide 23

When demand is unit elastic, total

Chapter 3: Elasticity Slide 24

EDP P increase P decrease

EDP > 1 TR decrease TR increase

EDP = 1 TR not change TR not change

EDP < 1 TR increase TR decrease

Chapter 3: Elasticity Slide 25

Chapter 3: Elasticity Slide 26

Chapter 3: Elasticity Slide 27

Percentage change in quantity of good 1

Chapter 3: Elasticity Slide 28

Chapter 3: Elasticity Slide 29

EXY > 0 X and Y are substituted

EXY < 0 X and Y are complement

EXY = 0 X and Y are independent

Chapter 3: Elasticity Slide 30

Percentage change in quantity demanded

Chapter 3: Elasticity Slide 31

EDI > 1 Luxuries

0< EDI < 1 Normal goods

EDI < 0 Inferior goods

Chapter 3: Elasticity Slide 32

Percentage change in quantity supplied

Chapter 3: Elasticity Slide 34

Chapter 3: Elasticity Slide 35

Chapter 3: Elasticity Slide 36

Chapter 3: Elasticity Slide 37

The input substitution

Chapter 3: Elasticity Slide 38

1 Can good news for farming be bad news for

Chapter 3: Elasticity Slide 40

Chapter 3: Elasticity Slide 41