2015 by McGraw-Hill Ryerson Ltd.

Chapter 3
Elasticity

2015 by McGraw-Hill Ryerson Ltd.

Learning Objectives
After this chapter, you will be
able to:

describe price elasticity of

demand, its relation to other
demand elasticities, and its
impact on sellers revenues
define price elasticity of supply
and the links between
production periods and supply
2015 by McGraw-Hill Ryerson Ltd.

Elastic and Inelastic

Demand
Price elasticity of demand shows how
responsive consumers are to price
changes.
Elastic demand means the % change in
QD is more than in price
Inelastic demand means the % change in
QD is less than in price.
Unit-elastic demand means the % change
in QD equals the % change in price.

2015 by McGraw-Hill Ryerson Ltd.

Elastic and Inelastic

Demand
FIGURE 3.1

2.40
2.00

Inelastic Demand Curve

for Ice cream Cones
2.40

20%

1.60

D1

50%

1.20
0.80
0.40
0

500

1000

Quantity Demanded
(cones per winter month)

Price ($ per cone)

Price ($ per cone)

Elastic Demand Curve

for Ice Cream Cones

20%

2.00

D2

1.60
10%

1.20
0.80
0.40
0

500

1000

Quantity Demanded
(cones per summer month)

2015 by McGraw-Hill Ryerson Ltd.

1800 2000

Perfectly Elastic and

Perfectly Inelastic Demand
(a)
Perfectly elastic demand means
a constant price and a
horizontal demand curve.
Perfectly inelastic demand
means a constant quantity
demanded and a vertical
demand curve.
2015 by McGraw-Hill Ryerson Ltd.

Perfectly Elastic and Perfectly

Inelastic Demand FIGURE 3.2
Perfectly Inelastic
Demand Curve
for Insulin

D3

1.60

D4

Price ($ per tonnes)

Price ($ per tonnes)

Perfectly Elastic
Demand Curve
for Soybeans

0
Quantity Demanded
(tonnes)

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1000
Quantity Demanded
(litres)

Impact on Total Revenue

A price change causes total
revenue to change in the
opposite direction when demand
is elastic.
A price change causes total
revenue to change in the same
direction when demand is
inelastic.

2015 by McGraw-Hill Ryerson Ltd.

Revenue Changes with Elastic

Revenues
with Elastic Demand
Demand
Figure 3.3 Page 63
FIGURE 3.3

Price ($ per hotdog)

Demand Curve for hot dogs

5
4

3
2

D
B

1
0

500

1000

1500

Quantity Demanded (hotdogs per day)

2015 by McGraw-Hill Ryerson Ltd.

Revenue Changes with Inelastic

Revenues
with Inelastic Demand
Demand
FIGURE 3.4
Figure 3.4 Page 64

Price ($ per ride)

Demand Curve for Amusement Park Rides

5
4
3

1
0

2000

4000

G
6000

8000

10 000

Quantity Demanded (riders each day)

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10

Total Revenue and Elasticity

FIGURE 3.5
Demand Elasticity and Changes in Total Revenue
Price
Change

Change in
Total Revenue

Elastic Demand

up
down

down
up

Inelastic Demand

up
down

up
down

Unit-Elastic Demand

up
down

unchanged
unchanged

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11

Determinants of Demand
Elasticity
There are four determinants of price
elasticity of demand:
portion of consumer incomes (products with
smaller portions are more inelastic)
access to substitutes (products with more
substitutes are more elastic)
necessities versus luxuries (more inelastic
for necessities and more elastic for luxuries)
time (more elastic with the passage of time)

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12

Calculating Demand Elasticity

A numerical value for price
elasticity of demand (ed) is
found by taking the ratio of the
changes in quantity demanded
and in price, each divided by its
average value.
In mathematical terms:
ed =
Qd average Qd

2015 by McGraw-Hill Ryerson Ltd.

13

Elasticity and a Linear

Demand Curve
A linear demand curve has a
different price elasticity (ed) at every
point.
At high prices, the change in Q is
D
large relative to average QD, while
the change in P is small relative to
average P, giving a large ed

At low prices, the change in QD is

small relative to average QD, while
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14

Elasticity and a Linear Demand

Curve FIGURE 3.6
Market Demand Curve for Sodas
Market Demand Schedules
for Sodas
Price
Elasticity
($ per
of Demand
(ed)
soda) (millions of sodas)
5
4
3
2
1
0

Quantity
Demanded

0
1
2
3
4
5

9.00
2.33
1.00
0.43
0.11

Price ($ per soda)

Price

5
ed > 1
4
3

ed = 1

2
ed < 1
1
D
0

Quantity Demanded
(millions of sodas)
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15

Income Elasticity
Income elasticity (ei) is the
responsiveness of a products
quantity demanded to changes
in consumer income.
In mathematical terms:
ei = Qd average Qd
I average I

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16

Cross-Price Elasticity
Cross-price elasticity (ei) is the
responsiveness of the quantity
demanded of one product (x) to a
change in price of another (y).
In mathematical terms:
exy = Qd average Qd
Py average Py

2015 by McGraw-Hill Ryerson Ltd.

17

Price Elasticity of Supply

Price elasticity of supply
measures the responsiveness of
quantity supplied to price
changes.
Elastic supply means the %
change in Qs is more than the %
change in price.
Inelastic supply means the %
change in Qs is less than the %

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18

Elastic and Inelastic Supply

FIGURE 3.7

Inelastic Supply Curve

For Tomatoes
S1

3
50%

2
100%

1
0

100 000

120000

Quantity Supplied
(kilograms per year)

2015 by McGraw-Hill Ryerson Ltd.

Price ($ per kilogram)

Price ($ per kilogram)

Elastic Supply Curve

for Tomatoes
4

S2

3
50%

2
20%

1
0

100 000 120 000

Quantity Supplied
(kilograms per year)

19

Perfectly Elastic and

Perfectly Inelastic Supply
Perfectly elastic supply means a
constant price and a horizontal
supply curve.
Perfectly inelastic supply means
a constant quantity supplied
and a vertical supply curve.

2015 by McGraw-Hill Ryerson Ltd.

20

Time and Supply Elasticity

Price elasticity of supply
changes over three production
periods:
Supply is perfectly inelastic in the
immediate run.
Supply is either elastic or inelastic
in the short run.
Supply is perfectly elastic for a
constant-cost industry and very

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21

In the Immediate and Short Run

FIGURE 3.8

Price ($ per kilogram)

S1

Short-Run
Supply Elasticity
For Strawberries
Price ($ per kilograms)

Immediate-Run
Supply Elasticity
for Strawberries

750 000
Quantity Supplied
(kilograms per month)

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S2

2.50
2.00

11

Quantity Supplied
(millions of kilograms per year)

22

Constant Cost Industry

If strawberries are produced in a
constant-cost industry:
A higher price of strawberries raises
production but not resource prices.
As new businesses enter the industry in
the long run due to a higher price of
strawberries, this price is gradually pushed
back down to its original level.
Therefore the long-run supply curve for a
constant-cost industry is perfectly elastic.

2015 by McGraw-Hill Ryerson Ltd.

23

Increasing Cost Industry

If strawberries are produced in an
increasing-cost industry:
A higher price of strawberries raises production
and also resource prices.
As new businesses enter the industry in the
long run due to a higher price of strawberries,
this price is gradually pushed back down to its
lowest possible level, but this level is higher
than it was originally.
Therefore the long-run supply curve for an
increasing-cost industry is very elastic.

2015 by McGraw-Hill Ryerson Ltd.

24

In

Time and the Price Elasticity of

the
Run
SupplyLong
(e)

Figure
3.8, Page 71 (continued from part (b))
FIGURE
3.8

Price ($ per kilograms)

Long-Run Supply Elasticity

S4

Constantcost Industry

S3

2.00
Increasingcost Industry

0
Quantity Supplied
(millions of kilograms per decade)

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25

Calculating Price Elasticity

of Supply
A numerical value for price elasticity
of supply (es) is found by taking the
ratio of the changes in quantity
supplied and in price, each divided
by its average value.
In mathematical terms:
es =
Qs average Qs
price average price

2015 by McGraw-Hill Ryerson Ltd.

26

Prophet of Capitalisms
Doom
According to Karl Marxs theory of
exploitation:
a products price is based on the amount
of labour that goes into producing it
capitalists cut costs by minimizing
workers wages and by maximizing the
length of the workday
capitalists keep any surplus value, which is
the excess of their revenues over their
costs

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27

Marxs Theory of Exploitation

FIGURE A
Creation of Surplus Value

Creation of Surplus Value

$50 Wage

$30 Wage

Daily Wage

$50

$30

Materials and
machine wear
and tear (M)

$10

$10

Surplus Value (SV)

$20

$40

Total Value

$80

$80

Exploitation Rate

(SV/W)

Value produced ($ per day)

(when producing 2 shirts or 1 suit)

80
60

W = 30

W = 50

W = 10

40
20

M = 10

SV = 10

SV = 40

$50

$30
Daily Wage

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