INF 313:

Fundamentals
of Economics

Dr. Rashed Refaat

‫ راﺷﺪ رﻓﻌﺖ‬.‫د‬
Lecture 06

Elasticity
Elasticity Price Elasticity of Demand
Price Elasticity of Supply
 Price Elasticity of Demand
How sensitive demand is to a change in price.
 Price Elasticity of Demand

• Enables to compare the sensitivity of the quantity

demanded to a change in price regardless of the
units in which the good is measured (units-free measure).
• Is how economists measure the responsiveness of
consumers to changes in prices for a commodity
all other influences on buying plans remain the same
 Elastic Demand
If Demand for a good is very sensitive to changes in price, the
demand is ELASTIC.

In other word

If a little bit change in prices, cause a lot changes in demand,

that means the demand of this good is elastic

Sensitive = ELASTIC
 Inelastic Demand

• Demand for a good that consumers will continue to buy

despite a price increase is INELASTIC

OR

• Even if price changes a lot, demand changes very little

Price Elasticity of Demand effect

Elastic

Inelastic
 Price Elasticity of Demand

Business decisions concerning prices are not

always a simple matter of adding some margin to

the cost of production of the commodity

(cost-plus pricing).
 Price Elasticity of Demand

Therefore, It is necessary for business to have some

idea of what the market will bear, and that is where

the price elasticity of demand enters the picture in

business decision-making.
 Methods to Measure
the Price Elasticity of Demand

(1) The price elasticity coefficient (midpoints formula),

(2) The total revenue test, and

(3) A simple examination of the demand curve.

Calculating Price Elasticity of Demand
Elasticity = 4
• Why using average price and average quantity ?
 Inelastic and Elastic Demand

price elasticity of demand between price elasticity of demand is greater

zero and one and the good is said to than one and the good is said to
have an Inelastic Demand have an Elastic Demand
 Price Elasticities of Demand

Inelastic demand Elastic demand

Cross Elasticity of Demand

Substitutes Complement

• You know that pizzas and • You also know that pizza and soft
burgers are substitutes. You also drinks are complements, and you
know that when the price of know that if the price of soft
burgers (a substitute for pizza) rises, drinks (a complement of pizza) rises, the
the demand for pizza increases. demand for pizza decreases.

But by how much?

Cross Elasticity of Demand
The magnitude of the cross elasticity of demand

The larger the cross elasticity (absolute value),

the greater is the change in demand and

the larger is the shift in the demand curve and

vice versa.
The magnitude of the cross elasticity of demand

• If two items are close substitutes, such as two brands of spring

water, the cross elasticity is large.

• If two items are close complements, such as movies and popcorn,

the cross elasticity is large.

• If two items are somewhat unrelated to each other, such as

newspapers and orange juice, the cross elasticity is small (even zero).
 Elasticity of Supply

• The degree to which a change in price will change supply

Elasticity depends on how easy it is to

change production quantity

 Elastic Supply

• Items that have supplies that are increased easily are ELASTIC,
the supply will go up/down a lot with a change in price.

Increased Easily = ELASTIC

• Ex. CDs, Books, Pizza (all can increase supply with little
difficulty; resources are easy to come by)
 Inelastic supply
• Items that have supplies that are increased with great difficulty are
INELASTIC, the supply will go up/down very little with a change in price.
Increased Difficulty = INELASTIC
• Ex. Cars (to increase production, need to build a new factory, hire 100s of
workers, etc.)
• Apples (to increase production, would have to plant more trees, taking
years to grow and produce apples)
 Responsiveness of the
quantity supplied to a change in price

Elastic Inelastic
If a change in price results in a big change in the
amount supplied, the supply curve appears ___(1)____
and is considered_____(2)_____.
A. Steeper
B. Flatter 1=B
C. Elastic
2= C
D. Inelastic
 Change in Supply

When factors other than price (non-price factors) affect the

supply curve, the entire curve shifts to the left or to the right.
Calculating the Elasticity of Supply
Calculating the Elasticity of Supply

Δ𝑄 10 − 13 −3
%Δ 𝑄 = × 100 = × 100 = × 100 = −26%
𝑄 (10 + 13) ÷ 2 11.5

Δ𝑃 20 − 30 −10
%Δ 𝑃 = × 100 = × 100 = × 100 = −40%
𝑃 (20 + 30) ÷ 2 25

Inelastic
Calculating the Elasticity of Supply

Δ𝑄 10 − 20 −10
%Δ 𝑄 = × 100 = × 100 = × 100 = −66.6%
𝑄 (10 + 20) ÷ 2 15

Δ𝑃 20 − 21 −1
%Δ 𝑃 = × 100 = × 100 = × 100 = −4.87%
𝑃 (20 + 21) ÷ 2 20.5

Elastic
 Inelastic and Elastic Supply
• If the quantity supplied is • A special intermediate case • If the supply curve is
fixed regardless of the occurs when the percentage horizontal and the
price, the supply curve is change in price equals the elasticity of supply is
percentage change in
vertical and the elasticity infinite.
quantity, No matter how
of supply is zero.
steep the supply curve is, if it
is linear and passes through
the origin.

Supply is perfectly inelastic. Supply is then unit elastic • Supply is perfectly elastic
 Inelastic and Elastic Supply

elasticity of supply between zero and elasticity of supply is greater than one
one and the good is said to have an and the good is said to have an
Inelastic supply Elastic supply
 The Factors That Influence the Elasticity of Supply

1) Resource substitution possibilities

2) Time frame for the supply decision

 The Factors That Influence the Elasticity of Supply

(1) Resource Substitution Possibilities

unique or rare productive resources = low or zero elasticity of supply

commonly available resources = high elasticity of supply