PowerPoint Presentations for

Principles of Microeconomics
Ninth Canadian Edition
by Mankiw/Kneebone/McKenzie

Adapted for the

Ninth Canadian Edition by

Marc Prud’Homme
University of Ottawa

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ELASTICITY AND
[Note to Production: Insert
chapter opener photo p. 86]

ITS APPLICATION

Chapter 5

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 ELASTICITY AND ITS APPLICATION
 Elasticity is a measure of how much buyers and sellers
respond to changes in market conditions.
 When studying how an event or policy affects a market,
we can discuss not only the direction of the effects but
also their magnitude.
 Elasticity is useful in many applications, as we will see
toward the end of the chapter.
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 ELASTICITY AND ITS APPLICATION
 To measure how much consumers respond to changes in
these variables, economists use the concept of elasticity.
 Elasticity is a measure of the responsiveness of quantity
demanded or quantity supplied to one of its determinants.

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 THE ELASTICITY OF DEMAND
THE PRICE ELASTICITY OF DEMAND AND ITS
DETERMINANTS
 Price elasticity of demand is a measure of how much the
quantity demanded of a good responds to a change in the price
of that good, computed as the percentage change in quantity
demanded divided by the percentage change in price.

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 THE ELASTICITY OF DEMAND
COMPUTING THE PRICE ELASTICITY OF DEMAND

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 THE ELASTICITY OF DEMAND
COMPUTING THE PRICE ELASTICITY OF DEMAND (CONT’D)
 For example, suppose a 10 percent increase in the price of an ice-cream cone
causes the amount of ice cream you buy to fall by 20 percent.

 The elasticity is 2, meaning that the change in the quantity demanded is

proportionately twice as large as the change in the price.
 Elasticity is a unitless measure, which is independent of the units that the
quantity demanded, or the price is measured in.
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 THE ELASTICITY OF DEMAND
THE MIDPOINT METHOD
 If you try calculating the price elasticity of demand between
two points on a demand curve, you will quickly notice an
annoying problem:
 The elasticity from point A to point B seems different
from the elasticity from point B to point A.

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 THE ELASTICITY OF DEMAND
THE MIDPOINT METHOD (CONT’D)
 For example:

Point A: Price = $4 Quantity = 120

Point B: Price = $6 Quantity = 80

 From point A to point B, the price rises by 50 percent, and the

quantity falls by 33 percent, PED = 0.66.
 From point B to point A, the price falls by 33 percent, and the
quantity rises by 50 percent, PED = 1.5.
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 THE ELASTICITY OF DEMAND
THE MIDPOINT METHOD (CONT’D)
 With the midpoint method:
Price = $5 Quantity = 100
 From point A to point B, the price rises by 40 percent and the
quantity falls by 40 percent.
 From point B to point A, the price falls by 40 percent and the
quantity rises by 40 percent.
 In both directions, PED = 1.
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 THE ELASTICITY OF DEMAND
THE MIDPOINT METHOD (CONT’D)

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 THE ELASTICITY OF DEMAND
THE VARIETY OF DEMAND CURVES
 Demand curves are classified according to their elasticity.
 Demand is elastic when the elasticity is greater than 1, so that
quantity moves proportionately more than the price.
 Demand is inelastic when the elasticity is less than 1, so that
quantity moves proportionately less than the price.
 If the elasticity is exactly 1, so that quantity moves the same amount
proportionately as price, demand is said to have unit elasticity.

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 FIGURE 5.1
[Note to Production: Insert Figure
The Price Elasticity of Demand 5.1 a & b, p. 91]

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 FIGURE 5.1
[Note to Production: Insert Figure
The Price Elasticity of Demand 5.1 c, p. 91]

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 FIGURE 5.1
[Note to Production: Insert Figure
The Price Elasticity of Demand 5.1 d & e, p. 91]

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 THE ELASTICITY OF DEMAND
TOTAL REVENUE AND THE PRICE ELASTICITY OF DEMAND
 Total revenue (in a market) is the amount paid by buyers
and received by sellers of a good, computed as the price of
the good times the quantity sold.

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 FIGURE 5.2
Total Revenue

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 THE ELASTICITY OF DEMAND
TOTAL REVENUE AND THE PRICE ELASTICITY OF DEMAND
(CONT’D)
 How does total revenue change as one moves along the
demand curve?
 It depends on the price elasticity of demand.

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 THE ELASTICITY OF DEMAND
TOTAL REVENUE AND THE PRICE ELASTICITY OF DEMAND
(CONT’D)
 The examples in Figure 5.3 illustrate some general rules:
1. When demand is inelastic (a price elasticity less than 1), price and
total revenue move in the same direction.
2. When demand is elastic (a price elasticity greater than 1), price and
total revenue move in opposite directions.
3. If demand is unit elastic (a price elasticity exactly equal to 1), total
revenue remains constant when the price changes.
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 FIGURE 5.3
How Total Revenue
Changes When Price Changes

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 THE ELASTICITY OF DEMAND
ELASTICITY AND TOTAL REVENUE
ALONG A LINEAR DEMAND CURVE
 A straight line has a constant slope.
 The slope of a linear demand curve is constant, but the
elasticity is not.
 The slope is the ratio of changes in the two variables.
 The elasticity is the ratio of percentage changes in the two variables.

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 FIGURE 5.4
Elasticity of a Linear
Demand Curve

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 THE ELASTICITY OF DEMAND
THE PRICE ELASTICITY OF DEMAND
AND ITS DETERMINANTS (CONT’D)
 What influences the elasticity of demand?
 Availability of close substitutes
 Necessities versus luxuries
 Definition of the market
 Time horizon

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 THE ELASTICITY OF DEMAND
OTHER DEMAND ELASTICITIES
 In addition to the price elasticity of demand, economists also use
other elasticities to describe the behaviour of buyers in a market:

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 Quick Quiz

1. A good tends to have a small price 4. The citizens of Lilliput spend a higher
elasticity of demand if fraction of their income on food than do
the citizens of Brobdingnag. The reason
a. the good is a necessity. could be that
b. there are many close substitutes. a. Lilliput has lower food prices, and the
price elasticity of demand is zero.
c. the market is narrowly defined.
b. Lilliput has lower food prices, and the
d. the long-run response is being price elasticity of demand is 0.5.
measured.
c. Lilliput has lower income, and the
income elasticity of demand is 0.5.
d. Lilliput has lower income, and the
income elasticity of demand is 1.5.
5-1 Copyright © 2024 Cengage Learning Canada, Inc. 5-25
 THE ELASTICITY OF SUPPLY
THE PRICE ELASTICITY OF SUPPLY AND ITS
DETERMINANTS
 Price elasticity of supply is a measure of how much the
quantity supplied of a good responds to a change in the
price of that good, computed as the percentage change in
quantity supplied divided by the percentage change in price.

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 THE ELASTICITY OF SUPPLY
THE PRICE ELASTICITY OF SUPPLY AND ITS DETERMINANTS
(CONT’D)
 Supply of a good is said to be:
 Elastic if the quantity supplied responds substantially to
changes in the price.
 Inelastic if the quantity supplied responds only slightly to
changes in the price.
 Supply is usually more elastic in the long run than in the short run.

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 Active Learning
Elasticity and Changes in Equilibrium

The supply of beachfront property is inelastic. The supply

of new cars is elastic.
Suppose population growth causes demand for both goods
to double (at each price, QD doubles).
1. For which product will P change the most?
2. For which product will Q change the most?

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 Active Learning
Answers

Beachfront property (inelastic supply):

P
1. When supply D1 D2 S
is inelastic, an increase
in demand has a bigger
P2 B
impact on price than
on quantity.
P1 A

Q
Q1 Q2
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 Active Learning
Answers

New cars (elastic supply):

P
2. When supply
D1 D2
is elastic, an increase
in demand has a bigger S
impact on quantity B
than on price. P2
A
P1

Q
Q1 Q2
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 THE ELASTICITY OF SUPPLY
COMPUTING THE PRICE ELASTICITY OF SUPPLY

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 THE ELASTICITY OF SUPPLY
COMPUTING THE PRICE ELASTICITY OF SUPPLY (CONT’D)
 Suppose an increase in the price of milk from $2.85 to $3.15
per 4 L container raises the amount that dairy farmers produce
from 9000 L to 11 000 L per month.
 Using the midpoint method, the percentage change in price is:
Percentage change in price = (3.15 ̶ 2.85) / 3.00 × 100
= 10 percent
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 THE ELASTICITY OF SUPPLY
COMPUTING THE PRICE ELASTICITY OF SUPPLY (CONT’D)
 Similarly, we calculate the percentage change in quantity
supplied as:
Percentage change in quantity supplied =
(11 000 ̶ 9000) / 10 000 × 100 = 20 percent

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 THE ELASTICITY OF SUPPLY
THE VARIETY OF SUPPLY CURVES
 Because the price elasticity of supply measures the
responsiveness of quantity supplied to the price, it is
reflected in the appearance of the supply curve .

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 FIGURE 5.5
[Note to Production: Insert Figure
The Price Elasticity 5.5 a & b, p. 98]
of Supply

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 FIGURE 5.5
[Note to Production: Insert Figure
The Price Elasticity 5.5 c, p. 98]
of Supply

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 FIGURE 5.5
[Note to Production: Insert Figure
The Price Elasticity 5.5 d & e, p. 98]
of Supply

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 FIGURE 5.6
How the Price
Elasticity of Supply
Can Vary

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 Quick Quiz

5. The price of a good rises from $16 to 7. The ability of firms to enter and exit
$24, and the quantity supplied rises a market over time means that, in the
from 90 to 110 units. Calculated with long run,
the midpoint method, the price
elasticity of supply is a. the demand curve is more elastic.

a. 1/5. b. the demand curve is less elastic.

b. ½. c. the supply curve is more elastic.

c. 2. d. the supply curve is less elastic.

d. 5.

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 THREE APPLICATIONS OF SUPPLY,
DEMAND, AND ELASTICITY
1. Can good news for farming be bad news for farmers?
2. Why did the Organization of the Petroleum Exporting
Countries (OPEC) international oil cartel in the 1970s
and 80s and, more recently, the COVID-19 pandemic
have on oil prices?
3. Does drug interdiction increase or decrease drug-related
crime?

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 THREE APPLICATIONS OF SUPPLY,
DEMAND, AND ELASTICITY
FARMING AND FARMERS
 Because hybrid wheat increases the amount of wheat that can
be produced on each hectare of land, farmers are now willing
to supply more wheat at any given price. In other words, the
supply curve shifts to the right.
 Does this discovery make farmers better off?

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 FIGURE 5.7
An Increase in Supply in the Market for Wheat

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 THREE APPLICATIONS OF SUPPLY,
DEMAND, AND ELASTICITY
OPEC, COVID-19, AND THE PRICE OF OIL
 In the 1970s, members of OPEC decided to raise the world
price of oil by reducing supply.
 They did the same in 1979 to 1981.
 In the short run, both the supply and demand for oil are
relatively inelastic.
 Over long periods of time, supply-and-demand curves are
more elastic.
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 FIGURE 5.8
A Reduction in Supply in the World Market for Oil

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 THREE APPLICATIONS OF SUPPLY,
DEMAND, AND ELASTICITY
OPEC, COVID-19, AND THE PRICE OF OIL (CONT’D)
 More recently, COVID-19 played havoc with the oil market in 2020.
 Consumers drove less, offices and plants shut down, and both leisure
and business air travel virtually disappeared.
 The pandemic resulted in a large shift to the left in the demand for oil,
leading to a dramatic decline in the price of oil because supply is
inelastic.
 In 2020, oil prices fell by over 70 percent from January to April, even
becoming negative in April.
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 THREE APPLICATIONS OF SUPPLY,
DEMAND, AND ELASTICITY
DRUGS
 To discourage the use of illegal drugs, the Canadian
government devotes millions of dollars each year to reducing
the flow of drugs into the country.
 Let’s use the tools of supply and demand to examine this
policy of drug interdiction.

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 FIGURE 5.9
Policies to Reduce the Use of Illegal Drugs

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 Quick Quiz

9. In competitive markets, farmers 11. Over time, technological advances

adopt new technologies that will increase consumers’ incomes and
eventually reduce their revenue reduce the price of smartphones. Each
because of these forces increases the amount
consumers spend on smartphones if
a. each farmer is a price taker. the income elasticity of demand is
greater than _______ and the price
b. farmers are short-sighted. elasticity of demand is greater the
______.
c. regulation requires the use of best
practices. a. 0; 0 b. 0; 1
d. consumers pressure farmers to c. 1; 0 d. 1; 1
lower prices.

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 Classroom Activity
How the Ball Bounces
 I need two volunteers.
 I’m going to give each of you a ball, and you’re going to
bounce your ball off the floor and catch it.
 Which ball has the greatest bounce?

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 [Note to Production: Insert
chapter opener photo p. 86]

THE END

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