ECON1210 Introductory microeconomics

2023-24 Semester 2
Tutorial 5 – Elasticity and its Applications

Teaching assistant: Donald Kwok

Roadmap
• Key concepts recall
• Introduction to Elasticities
• Determinants of Elasticities of Demand and Supply
• Types of Elasticity of Demand
• Quick Prediction Formulas

• Discussion questions
• 4 Example questions
• 6 Past exam questions

• Attendance exercise
 Key concept recall – Introduction to Elasticities
If demand is... A price increase will... A price reduction will...
Elasticity of demand / supply reduce total increase total
expenditure expenditure

• measuring how responsive the quantity elastic

(  )
P x Q = P Q P x Q = PQ
demanded / supplied is to a change in price
increase total reduce total
expenditure expenditure
inelastic
(  )
P x Q = PQ P x Q = PQ
Elastic
• A demand / supply curve is elastic when an increase in price changes the
quantity demanded / supplied a lot
Inelastic
• A demand / supply curve is inelastic when an increase in price changes the
quantity demanded / supplied just a little
Key concept recall –
Determinants of Elasticity of Demand
Key concept recall –
Determinants of Elasticity of Supply
 Key concept recall – Types of Elasticity of Demand

Type Formula Interpretation

Point (price) elasticity of ∆𝑄 𝑃0 The elasticity at a particular point

demand ×
∆𝑃 𝑄0
Arc (price) elasticity of 𝑄𝑑1 + 𝑄𝑑0 The elasticity across two points
(𝑄𝑑1 − 𝑄𝑑0 )/( )
demand 2 (mid-point formula)
𝑃 +𝑃
(𝑃1 − 𝑃0 )/( 1 2 0 )
Cross-price elasticity of ∆𝑄𝑑𝑥 /𝑄𝑑𝑥 Substitutes: positive
demand ∆𝑃𝑦 /𝑃𝑦 Complements: negative

Income elasticity of ∆𝑄𝑑𝑥 /𝑄𝑑𝑥 Normal goods: positive

demand Luxury goods: greater than one
∆𝐼/𝐼 Inferior goods: negative
 Key concept recall – Quick Prediction Formulas
Percentage Change in Price from a Shift in Demand
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
=
𝐸𝑑 + 𝐸𝑠

Percentage Change in Price from a Shift in Supply

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑢𝑝𝑝𝑙𝑦
=−
𝐸𝑑 + 𝐸𝑠

With the information about elasticities of demand and supply,

we can also obtain the percentage change in quantity as a result!
Discussion questions
Q1
Determine (a) whether each of the following scenario conveys the elasticity of
demand or supply, and (b) find the corresponding elasticity of demand or supply.

(i) Annie drinks a cup of latte every morning without paying attention to the price.
(ii) Consider the demand for Starbucks coffee. Suppose a price increase would cause
all consumers to buy from Pacific coffee while a price decrease results in all
consumers buying from Starbucks.
(iii) Joe places an order at a gas station, saying that “I’d like 10 gallons of gas”.
(iv) Jerry also places an order at a gas station, saying that “I’d like $10 of gas”.
(v) Tom’s marginal cost of producing orange juice is given by MC(q) = 9q, where q is
the amount of range juice (in liters).
Discussion questions
Q1
Solution
(i) and (iii): Perfectly inelastic demand → Ed = 0
• Fixed quantity demanded
• Any price change has no effect on quantity demanded

(ii): Perfectly elastic demand → Ed = – ∞

• Price increases a little, Qd drops to zero

• Price drops a little, Qd increase a lot

Discussion questions
Q1
Solution
(iv): Unitary elastic demand → Ed = -1
• Total expenditure is fixed (P× Q = Constant)
• In other words, 1% increase (decrease) in price will
lead to 1% decrease (increase) in quantity demanded

(v): Unitary elastic supply → Es = 1

• The line MC(q) = 9q passes through the origin
Discussion questions
Q2
Discussion questions
Q2
Solution
(I) lemonade v.s. ivory (Lemonade → more elastic)
• Increase production of ivory is very expensive; production of lemonade can increase
with little extra cost
(II) short-run housing supply v.s. long-run housing supply (Long-run housing supply →
more elastic)
• Immediately following a price increase, producers can expand output only by using
their current capacity.
• Overtime, producers can expand their capacity
(III) Hong Kong market for coal v.s. global market for coal (Hong Kong market for coal
→ more elastic)
• The wider the scope of the market of a good, the less elastic its supply. Narrower
scope, more elastic
Discussion questions
Q2
Discussion questions
Q3
Discussion questions
Q3
Solution
Increase in demand → two points on the same supply
• Consider (arc) elasticity of supply!
1517−1443
• %∆𝑄 = 1443+1517 = 5%
2
105−95
• %∆𝑃 = 95+105 = 10%
2

%∆𝑄 5%
→ 𝐸𝑠 = %∆𝑃 = 10% = 0.5

A. The good is a habit-forming good. → Inelastic demand

B. There are lots of substitutes for the good. → Elastic demand
C. Firms producing the good have excess capacity in production. → Elastic supply
D. Firms producing the good have used factor inputs which are more specialized.
→ Inelastic supply
Discussion questions
Q3
Solution
Discussion questions
Q4
Discussion questions
Q4
Solution
• Typhoon destroyed harvest of X → supply of X decreases
• Price of X will rise and quantity transacted of X will fall
• Total sales revenue is uncertain (may increase, decrease or stay unchanged),
depending on the elasticity of demand

TR increases with an inelastic demand TR decreases with an elastic demand

Discussion questions
Past Exam Question 2021 Fall Midterm Q40
Discussion questions
Past Exam Question 2021 Fall Midterm Q40
Solution
(i) Demand should become more inelastic as quantity increases → False
(ii) True
Discussion questions
Past Exam Question 2021 Fall Midterm Q40
Solution
∆𝑄 𝑃
(iii) Consider Es = ∆𝑃 × 𝑄0 and Supply: 𝑃 = 𝑎 + 𝑏𝑄
0

Put 𝑃 = 𝑎 + 𝑏𝑄 into the Es formula, we have

∆𝑄 𝑎+𝑏𝑄0 1 𝑎 𝑎
Es = ∆𝑃 × =𝑏× + 𝑏 = 𝑏𝑄 + 1
𝑄0 𝑄0 0

Note that 𝑎 < 0 and 𝑏 > 0.

For a supply that has a positive x-intercept, it becomes more elastic as quantity
increases → True

In general, the elasticity of supply along a linear supply curve would converge to 1 as
quantity increases.
Discussion questions
Past Exam Question 2021 Fall Midterm Q40
Solution
(iv) For any linear supply curve
• Elastic (Es > 1) when it intersects the positive vertical axis
• Inelastic (Es < 1) when it intersects the positive horizontal axis
• Unitary elastic (Es = 1) when it passes through the origin
→ True
Discussion questions
Past Exam Question 2021 Fall Midterm Q41
Discussion questions
Past Exam Question 2021 Fall Midterm Q41
Solution
(i) “The Avengers” in cinemas v.s. “The Avengers” online
• More substitutes online than in cinemas (e.g. a lot of movies available in Netflix
but relatively limited in cinemas)
• True: in cinemas less price elastic than online

(ii) pepsi v.s. tap water

• Tap water is a necessity but Pepsi is not
• False: pepsi more price elastic than tap water
Discussion questions
Past Exam Question 2021 Fall Midterm Q41
Solution
(iii) vegetables v.s. lettuce
(iv) chocolate bars v.s. Kit Kat chocolate bars
• The wider the scope of the category of a good, the less elastic its demand.
Narrower scope, more elastic
• Both True
Discussion questions
Past Exam Question 2022 Fall Midterm Q34-35
Discussion questions
Past Exam Question 2022 Fall Midterm Q34-35
Solution
Q34
Quantity supplied increase at any given price → Increase in supply
270
• Percentage increase in supply = 9000 = 3%

• S↑ → P↓ Q↑

By the quick prediction formula, we have

3%
• Percentage decrease in price = 0.5+1.85 = 1.2766%

Hence, the equilibrium price will decrease by 1.28%.

Discussion questions
Past Exam Question 2022 Fall Midterm Q34-35
Solution
Q35
Increase in supply → two points on the same demand
• Consider elasticity of demand!

%∆𝑄
𝐸𝑑 =
%∆𝑃
%∆𝑄
−0.5 =
−1.28%
%∆𝑄 = 0.6383%
Hence, the equilibrium quantity will increase by 0.64%.
Discussion questions
Past Exam Question 2023 Summer Midterm Q35-36
Discussion questions
Past Exam Question 2023 Summer Midterm Q35-36
Solution
Q35
Put 𝑄A = 150, 𝑃A = 43 and 𝑃B = 36 into the demand function, we have
150 = 609.8 – 3(43) + 1.7(36) – 2.8𝐼
𝐼 = 140

∆𝑄A 𝐼
Income elasticity of demand = ×
∆𝐼 𝑄A

= -2.8 × 140/150
= -2.61
Discussion questions
Past Exam Question 2023 Summer Midterm Q35-36
Solution
Q36
∆𝑄A 𝑃B
Cross-price elasticity of demand = ×
∆𝑃B 𝑄A

= 1.7 × 36/150
= 0.41
Thank you for joining the tutorial!