UNIT 5: ELASTICITY

Unit 5: Elasticity
Part 1: Price Elasticity of
Demand
Chapter 6

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
What We Will Learn

1. What is elasticity?

2. How do we calculate the price elasticity of demand?

3. How do we interpret the price elasticity of demand?

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Consumer Responsiveness
 To measure consumer responsiveness to changes in price, income, and
other factors affecting demand, economists use the elasticity.

 The elasticity is:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸

 Because the elasticity employs percentages, it is independent of the

units of measure for quantity and price. It also works for both linear and
non-linear demand curves!

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Consumer Price Responsiveness
𝑃𝑃

 As price changes, the quantity

demanded will change; however,
the extent of the change in 𝑃𝑃1
quantity will depend on how
𝑃𝑃2
price responsive consumers are. 𝐷𝐷

𝑄𝑄1 𝑄𝑄2 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Consumer Price Responsiveness
𝑃𝑃

 As price changes, the quantity

demanded will change; however,
the extent of the change in 𝑃𝑃1
quantity will depend on how
𝑃𝑃2
price responsive consumers are.

𝐷𝐷
𝑄𝑄1𝑄𝑄3 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Price Elasticity of Demand

 The Price Elasticity of Demand measures how responsive

consumers are to a change in price:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

 The elasticity is not the slope of the demand curve, but it is related
to the slope of the demand curve.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Calculating the Elasticity
𝑃𝑃
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

𝑃𝑃1
 Even if the slope is constant, the
elasticity will change as we move along 𝑃𝑃2
the demand curve. 𝑃𝑃3

 To calculate the elasticity correctly, we 𝐷𝐷

will need to take the average over a
range. 𝑄𝑄1 𝑄𝑄2 𝑄𝑄3 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Midpoint Formula
 We can calculate the Price Elasticity of Demand using the following
formula:
Change in Quantity Change in Price

𝑄𝑄2 − 𝑄𝑄1 𝑃𝑃2 − 𝑃𝑃1

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = ÷
𝑄𝑄1 + 𝑄𝑄2 𝑃𝑃1 + 𝑃𝑃2
2 2
Average Quantity Average Price

 The midpoint formula uses the average of the initial and final
quantities and the average of the initial and final prices to
determine the elasticity between two points.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 5: ELASTICITY
The Price Elasticity of Demand
 Because the quantity purchased always increases as the price
declines, the Price Elasticity of Demand is always negative:

% 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑖𝑖𝑖𝑖 𝑄𝑄𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑖𝑖𝑖𝑖 𝑃𝑃𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

 Because it is always negative, by convention some economists

talk about the price elasticity of demand in absolute values (i.e.,
without the negative sign).

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Price Elasticity of Demand
 If the Price Elasticity of Demand is between 0 and -1 (absolute value
between 0 and 1), we say demand is inelastic.
‒ The percentage change in quantity is less than the percentage change in
price.

 If the Price Elasticity of Demand is equal to -1 (absolute value 1), we

say that demand is unit elastic.
‒ The percentage change in quantity is equal to the percentage change in price.

 If the Price Elasticity of Demand is below -1 (above an absolute value

of 1), we say that demand is elastic.
‒ The percentage change in quantity is greater than the percentage change in
price.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 5: ELASTICITY
Price Elasticity of Demand
𝑃𝑃
 All demand curves will have an Elastic
elastic portion and an inelastic Portion
portion separated by a point of
unit elasticity. Inelastic
Portion
 For some demand curves, the Unit
elastic portion will be larger than Elastic
𝐷𝐷
the inelastic portion or vice Point
versa.
𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Price Elasticity of Demand
𝑃𝑃 A mostly elastic
 All demand curves will have an demand curve
elastic portion and an inelastic
Elastic
portion separated by a point of Portion
unit elasticity. Inelastic
Portion

 For some demand curves, the Unit 𝐷𝐷

elastic portion will be larger than Elastic
the inelastic portion or vice Point
versa.
𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Price Elasticity of Demand
𝑃𝑃 A mostly inelastic
demand curve
 All demand curves will have an
Elastic
elastic portion and an inelastic
Portion
portion separated by a point of
unit elasticity. Inelastic
Portion
 For some demand curves, the Unit
elastic portion will be larger than Elastic
the inelastic portion or vice Point 𝐷𝐷
versa.
𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Finding the Market Price and Quantity
 Suppose we have: 𝑃𝑃
100
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 100 − 2𝑄𝑄𝐷𝐷
$80
$76
Find the elasticity of demand between
the prices $80 and $76, and between
the prices $30 and $26. $30 𝐷𝐷
$26

0 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Finding the Market Price and Quantity
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 100 − 2𝑄𝑄𝐷𝐷 𝑃𝑃
100
80 = 100 − 2𝑄𝑄𝐷𝐷
$80
80 − 100 = 100 − 2𝑄𝑄𝐷𝐷 − 100 $76

−20 = −2𝑄𝑄𝐷𝐷 $30 𝐷𝐷

$26
−20 −2𝑄𝑄𝐷𝐷
= → 𝑄𝑄𝐷𝐷 = 10
−2 −2 0 10 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Finding the Market Price and Quantity
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 100 − 2𝑄𝑄𝐷𝐷 𝑃𝑃
100
76 = 100 − 2𝑄𝑄𝐷𝐷
$80
76 − 100 = 100 − 2𝑄𝑄𝐷𝐷 − 100 $76

−24 = −2𝑄𝑄𝐷𝐷 $30 𝐷𝐷

$26
−24 −2𝑄𝑄𝐷𝐷
= → 𝑄𝑄𝐷𝐷 = 12
−2 −2 0 10 12 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Finding the Market Price and Quantity
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑃𝑃
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
100 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
𝑄𝑄2 − 𝑄𝑄1 𝑃𝑃2 − 𝑃𝑃1
= ÷ $80 −3.54
𝑄𝑄1 + 𝑄𝑄2 𝑃𝑃1 + 𝑃𝑃2
2 2 $76

12 − 10 76 − 80
= ÷ $30
10 + 12 80 + 76 𝐷𝐷
2 2 $26

= −3.54 Demand is Elastic! 0 10 12 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Finding the Market Price and Quantity
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 100 − 2𝑄𝑄𝐷𝐷 𝑃𝑃
100
30 = 100 − 2𝑄𝑄𝐷𝐷
$80
30 − 100 = 100 − 2𝑄𝑄𝐷𝐷 − 100 $76

−70 = −2𝑄𝑄𝐷𝐷 $30 𝐷𝐷

$26
−70 −2𝑄𝑄𝐷𝐷
= → 𝑄𝑄𝐷𝐷 = 35
−2 −2 0 10 12 35 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Finding the Market Price and Quantity
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷: 𝑃𝑃 = 100 − 2𝑄𝑄𝐷𝐷 𝑃𝑃
100
26 = 100 − 2𝑄𝑄𝐷𝐷
$80
26 − 100 = 100 − 2𝑄𝑄𝐷𝐷 − 100 $76

−74 = −2𝑄𝑄𝐷𝐷 $30 𝐷𝐷

$26
−74 −2𝑄𝑄𝐷𝐷
= → 𝑄𝑄𝐷𝐷 = 37
−2 −2 0 10 12 35 37 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Finding the Market Price and Quantity
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑃𝑃
100
𝑄𝑄2 − 𝑄𝑄1 𝑃𝑃2 − 𝑃𝑃1
= ÷ $80
𝑄𝑄1 + 𝑄𝑄2 𝑃𝑃1 + 𝑃𝑃2 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
2 2 $76 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
−0.39
37 − 35 26 − 30
= ÷ $30
35 + 37 30 + 26 𝐷𝐷
2 2 $26

= −0.39 Demand is Inelastic! 0 10 12 35 37 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY

Unit 5: Elasticity
Part 2: Price Elasticity
Determinants and Firm
Revenue
Chapter 6

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
What We Have Learned

 The Price Elasticity of Demand measures how responsive

consumers are to a change in price:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 < −1 ∶ Demand is Elastic.

 −1 < 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 < 0 ∶ Demand is Inelastic.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
What We Will Learn

1. What determines the elasticity of demand?

2. How is elasticity related to total firm revenue?

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Determinants of the Price Elasticity of Demand
 Availability of a close substitute:
‒ If consumers can easily switch to another good, they will be more price sensitive
(larger price elasticity of demand).
‒ If consumers cannot easily switch to another good, they will be less price
sensitive (lower price elasticity of demand).

 Passage of Time:
‒ It takes time for consumers to adapt to changes in prices. Over longer time
periods, demand becomes more elastic with respect to price.

 Luxuries vs. Necessities:

‒ Consumers are usually more price sensitive with respect to luxury goods they can
live without compared to necessity goods that they must have.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Determinants of the Price Elasticity of Demand

 Definition of the Market:

‒ If we define the market broadly by looking at a product class, there are
fewer substitutes, so demand is less elastic.
‒ If we define the market narrowly by looking at a specific product made by a
specific supplier, there will be more substitutes, so demand will be more
elastic.

 Share of a Consumer’s Budget:

‒ If the money spent on the good is a larger share of the consumer’s budget,
demand will be more elastic.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Total Revenue
 We learned in Unit 4 that the Total Revenue for suppliers is
calculated as:

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 × 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

 Because an increase in price causes a reduction in quantity sold,

whether revenues increase or decrease will depend on how
responsive consumers are to the price increase. Likewise, while a
decrease in price causes the quantity sold to increase, there is not
guarantee that the increased sales volume will make up for lost
revenue from the price cut.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 5: ELASTICITY
Total Revenue
𝑃𝑃

Which revenue box is bigger?

𝑃𝑃1
𝑃𝑃2
Should we reduce price or not?
𝐷𝐷

𝑄𝑄1 𝑄𝑄2 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Price Elasticity of Demand and Total Revenue
 Elastic Demand
‒ An increase in price causes a proportionately larger decrease in quantity
sold, so revenues fall.
‒ A decrease in price causes a proportionately larger increase in quantity
sold, so revenues rise.
 Inelastic Demand
‒ An increase in price causes a proportionately smaller decrease in quantity
sold, so revenues rise.
‒ A decrease in price causes a proportionately smaller increase in quantity
sold, so revenues fall.
 Unit Elastic Demand
‒ An increase or decrease in price leaves revenues unchanged. At the point
of Unit Elasticity, Revenues are at a Maximum!

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Perfectly Inelastic Demand
𝑃𝑃
 At one extreme, consumers could have
perfectly inelastic demand.

 The price elasticity of demand is Zero. 𝑃𝑃1

Consumers want to buy a particular
𝑃𝑃2
quantity and will pay any price for it.

 In reality, this situation is likely to occur 𝐷𝐷

only over a certain price range.
𝑄𝑄1 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Perfectly Elastic Demand
 At the other extreme, consumers could 𝑃𝑃
have perfectly elastic demand, also
called infinitely elastic demand.

 The price elasticity of demand is infinite

∞ . Consumers will buy any quantity 𝑃𝑃1 𝐷𝐷
firms can produce at or below the current
market price, but will never pay more than
𝑃𝑃1 .

 We will see this type of behaviour again in

Unit 8 when we examine competitive
markets. 𝑄𝑄1 𝑄𝑄2 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY

Unit 5: Elasticity
Part 3: The Income and Cross-
Price Elasticities of Demand
Chapter 6

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
What We Will Learn
1. What is the Income Elasticity of Demand?

2. How do we calculate and interpret the Income Elasticity of

Demand?

3. What is Cross-Price Elasticity of Demand?

4. How do we calculate and interpret the Cross-Price Elasticity of

Demand?

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Income Elasticity of Demand
 The income elasticity of demand tells us how responsive consumer
demand is to changes in income (I).

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

 The income elasticity will vary depending on the type of good and
the level of income a consumer has.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Midpoint Formula
 We can calculate the Income Elasticity of Demand using the
following formula:
Change in Quantity Change in Income

𝑄𝑄2 − 𝑄𝑄1 𝐼𝐼2 − 𝐼𝐼1

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = ÷
𝑄𝑄1 + 𝑄𝑄2 𝐼𝐼1 + 𝐼𝐼2
2 2
Average Quantity Average Income

 The midpoint formula uses the average of the initial and final
quantities and initial and final incomes to determine the elasticity
between two points.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 5: ELASTICITY
Income Elasticity of Demand
 The income elasticity of demand could be positive or negative,
depending on whether consumers buy more or less of the good as
income increases:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

 If the 𝐼𝐼𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 > 0 then as I increases, Q also increases

 when an increase in income generates an increase in quantity
consumed, the good is called a normal good.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Income Elasticity of Demand
 The income elasticity of demand could be positive or negative,
depending on whether consumers buy more or less of the good as
income increases:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

 If the 𝐼𝐼𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 > 1 then % ∆ 𝑄𝑄𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 > % ∆ 𝐼𝐼𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛

 an increase in income generates a large increase in quantity
consumed so the good is called a luxury good; conversely, a
decrease in income generates a large decrease in quantity
consumed.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Income Elasticity of Demand
 The income elasticity of demand could be positive or negative,
depending on whether consumers buy more or less of the good as
income increases:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

 If 0 ≤ 𝐼𝐼𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 ≤ 1 then % ∆ 𝑄𝑄𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 ≤ % ∆ 𝐼𝐼𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛

 an increase in income generates a small increase in quantity
consumed so the good is called a necessity good; conversely, a
decrease in income generates only a small decrease in quantity
consumed.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Income Elasticity of Demand
 The income elasticity of demand could be positive or negative,
depending on whether consumers buy more or less of the good as
income increases:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

 If the 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 < 0 then an increase in income causes the

quantity consumed to fall, so the good is called an inferior good;
conversely, a decrease in income causes quantity consumed to
rise.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Cross-Price Elasticity of Demand
 The cross-price elasticity of demand tells us how responsive
consumer demand for one product is to changes in the price of
another product.

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐴𝐴

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐵𝐵

 The cross-price elasticity will tell us about the relationship between

two goods within a consumer’s consumption basket.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Midpoint Formula
 We can calculate the Cross-Price Elasticity of Demand using the
following formula:
Change in Quantity of 𝐴𝐴 Change in Price of 𝐵𝐵

𝑄𝑄2,𝐴𝐴 − 𝑄𝑄1,𝐴𝐴 𝑃𝑃2,𝐵𝐵 − 𝑃𝑃1,𝐵𝐵

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = ÷
𝑄𝑄1,𝐴𝐴 + 𝑄𝑄2,𝐴𝐴 𝑃𝑃1,𝐵𝐵 + 𝑃𝑃2,𝐵𝐵
2 2

Average Quantity of 𝐴𝐴 Average Price of 𝐵𝐵

 The midpoint formula uses the average of the initial and final
quantities and prices to determine the elasticity between two points.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Cross-Price Elasticity of Demand
 The cross-price elasticity of demand could be positive or negative,
depending on whether consumers buy more or less of good 𝐴𝐴 as the
price of good 𝐵𝐵 changes:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐴𝐴

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐵𝐵

 If the 𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 > 0 then 𝑄𝑄𝐴𝐴 increases when 𝑃𝑃𝐵𝐵 increases;
similarly 𝑄𝑄𝐴𝐴 decreases when 𝑃𝑃𝐵𝐵 decreases. An increase in the price of 𝐵𝐵
causes consumers to switch away from good 𝐵𝐵 and buy more good 𝐴𝐴;
similarly, a decrease in the price of 𝐵𝐵 causes consumers to switch away
from good 𝐴𝐴 while buying more good 𝐵𝐵. Therefore, the two goods are
substitutes.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Cross-Price Elasticity of Demand
 The cross-price elasticity of demand could be positive or negative,
depending on whether consumers buy more or less of good 𝐴𝐴 as the
price of good 𝐵𝐵 changes:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐴𝐴

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐵𝐵

 If the 𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 < 0 then 𝑄𝑄𝐴𝐴 increases when

𝑃𝑃𝐵𝐵 decreases; similarly 𝑄𝑄𝐴𝐴 decreases when 𝑃𝑃𝐵𝐵 increases. A decrease in
the price of 𝐵𝐵 causes consumers to buy more good 𝐵𝐵 and to buy more
good 𝐴𝐴 also; similarly, an increase in the price of 𝐵𝐵 causes consumers
to buy less good 𝐵𝐵 and to buy less good 𝐴𝐴 also. Therefore, the two
goods are complements.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Cross-Price Elasticity of Demand
 The cross-price elasticity of demand could be positive or negative,
depending on whether consumers buy more or less of good A as
the price of good B changes:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐴𝐴

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐵𝐵

 If the 𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟−𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 0 then 𝑄𝑄𝐴𝐴 does not change when

𝑃𝑃𝐵𝐵 increases or decreases. There is no relationship between the
two goods.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY

Unit 5: Elasticity
Part 4: The Price Elasticity
of Supply
Chapter 6

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
What We Will Learn

1. What is the Price Elasticity of Supply?

2. How do we calculate and interpret the Price Elasticity of Supply?

3. How does the Price Elasticity of Supply relate to the market

price?

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Producer Price Responsiveness
𝑃𝑃

 As price changes, the quantity

supplied will change; however,
the extent of the change in
quantity will depend on how 𝑃𝑃2 𝑆𝑆
price responsive producers are.
𝑃𝑃1

𝑄𝑄1 𝑄𝑄2 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Producer Price Responsiveness
𝑃𝑃
𝑆𝑆
 As price changes, the quantity
supplied will change; however,
the extent of the change in
quantity will depend on how 𝑃𝑃2
price responsive producers are.
𝑃𝑃1

𝑄𝑄1𝑄𝑄3 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Price Elasticity of Supply

 The Price Elasticity of Supply measures how responsive producers

are to a change in price:

% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 =
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

 The elasticity is not the slope of the supply curve, but it is related
to the slope of the supply curve.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Calculating the Elasticity
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 𝑃𝑃
% 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃

 Even if the slope is constant, the 𝑆𝑆

elasticity will change as we move along 𝑃𝑃3
the supply curve. 𝑃𝑃2
𝑃𝑃1
 To calculate the elasticity correctly, we
will need to take the average over a
range.
𝑄𝑄1 𝑄𝑄2 𝑄𝑄3 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Midpoint Formula
 We can calculate the Price Elasticity of Supply using the following
formula:
Change in Quantity Change in Price

𝑄𝑄2 − 𝑄𝑄1 𝑃𝑃2 − 𝑃𝑃1

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = ÷
𝑄𝑄1 + 𝑄𝑄2 𝑃𝑃1 + 𝑃𝑃2
2 2
Average Quantity Average Price

 The midpoint formula uses the average of the initial and final
quantities and initial and the final prices to determine the elasticity
between two points.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023
UNIT 5: ELASTICITY
The Price Elasticity of Demand

 Because the quantity supplied always increases as the price

increases, the Price Elasticity of Supply is always positive:

% 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑖𝑖𝑖𝑖 𝑄𝑄𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
% 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑖𝑖𝑖𝑖 𝑃𝑃𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
The Price Elasticity of Supply
 If the Price Elasticity of Supply is between 0 and 1, we say supply is
inelastic.
‒ The percentage change in quantity is less than the percentage change in price.

 If the Price Elasticity of Supply is equal to 1, we say that supply is unit

elastic.
‒ The percentage change in quantity is equal to the percentage change in price.

 If the Price Elasticity of Supply is greater than 1, we say that supply is

elastic.
‒ The percentage change in quantity is greater than the percentage change in price.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Price Elasticity of Supply
𝑃𝑃
 All supply curves will have an Inelastic
elastic portion and an inelastic Portion
portion separated by a point of Elastic
𝑆𝑆
unit elasticity. Portion

 For some supply curves, the Unit

elastic portion will be larger than Elastic
the inelastic portion or vice Point
𝐷𝐷
versa.
𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Price Elasticity of Supply
𝑃𝑃 A mostly elastic
 All supply curves will have an supply curve
elastic portion and an inelastic
portion separated by a point of Inelastic
Elastic Portion
unit elasticity. Portion
𝑆𝑆
 For some supply curves, the Unit
elastic portion will be larger than Elastic
the inelastic portion or vice Point
versa.
𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Price Elasticity of Supply
A mostly inelastic
𝑃𝑃
supply curve 𝑆𝑆
 All supply curves will have an
elastic portion and an inelastic Inelastic
portion separated by a point of Portion
unit elasticity.

 For some supply curves, the Elastic Unit

elastic portion will be larger than Portion Elastic
the inelastic portion or vice Point
versa.
𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Determinants of the Price Elasticity of Supply
 Availability of Inputs:
‒ If inputs (labour, materials, capital) are easy to obtain, firms can easily
increase production in response to price increases. Supply will be more
elastic.
‒ If inputs are difficult to obtain, firms cannot easily increase production in
response to price increases. Supply will be less elastic.

 Passage of Time:
‒ Over a short time frame it is difficult to hire (and sometimes fire) workers
and difficult to source new materials and capital equipment, so supply will
be less elastic in the short term.
‒ Over a long time frame, firms can hire and train workers, open or close
production facilities, and find substitute materials or production processes,
so supply will be more elastic over the long term.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023

UNIT 5: ELASTICITY
Elasticity of Supply and the Market Price
 For a given 𝑃𝑃 𝑃𝑃
change in 𝑆𝑆
consumer
demand, the
market price will 𝑃𝑃3
change more 𝑆𝑆
when producers 𝑃𝑃 𝑃𝑃2
𝑃𝑃1
are less price 1

responsive. 𝐷𝐷′ 𝐷𝐷′

𝐷𝐷 𝐷𝐷

𝑄𝑄1 𝑄𝑄2 𝑄𝑄 𝑄𝑄1𝑄𝑄3 𝑄𝑄

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2023