ECO 1104 Lecture Notes - Lecture 8: Economic Surplus, Toothpaste, Reservation Price
5 Oct 2018
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ECO 1104 LECTURE 8- ELASTICITY
Using price elasticity of demand
●Remember that slope (∆y/∆x) is not the same as elasticity (%∆x/%∆y) .
●The elasticity of demand is different at different points along a linear demand curve (because
changes in Q or P is a different % of the mid-point at different points on the line), while slope is
the same.
Elastic demand: decreasing price increases revenue
Inelastic demand: decreasing price decreases revenue
Price elasticity of supply
The concept of elasticity can also be applied to supply.
The price elasticity of supply measures producers’ response (in quantity) to a change in price.
– Uses same midpoint formula but replaces quantity demanded with quantity supplied.
– Elasticity is always positive. – Same interpretation:
• Elastic: εs >1.
• Unit Elastic: εs =1.
• Inelastic: εs <1.
Determinants of price elasticity of supply
●Producers are more sensitive to price changes for some goods and services than for others.
Many factors determine producers’ responsiveness to price changes.
– Availability of inputs.
– Flexibility of the production process.
– Adjustment time.
Cross-price elasticity of demand
• The cross-price elasticity of demand is a measure of how the quantity demanded of one good changes
when the price of a different good changes.
• The midpoint formula calculates the elasticity between the quantity demanded of good A and the price
of good B:
Document Summary
Remember that slope ( y/ x) is not the same as elasticity (% x/% y) . The elasticity of demand is different at different points along a linear demand curve (because changes in q or p is a different % of the mid-point at different points on the line), while slope is the same. The concept of elasticity can also be applied to supply. The price elasticity of supply measures producers" response (in quantity) to a change in price. Uses same midpoint formula but replaces quantity demanded with quantity supplied. Same interpretation: elastic: s >1, unit elastic: s =1, inelastic: s <1. Producers are more sensitive to price changes for some goods and services than for others. Many factors determine producers" responsiveness to price changes. A,b <0: the two goods are complements. Income elasticity of demand: the income elasticity of demand is a measure of how much the quantity demanded changes in response to a change in consumers" incomes.
