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ECON MODULE 3

Chapter Overview

  • Chapter Title: Elasticity

  • Prepared by: Mark Lovewell, Toronto Metropolitan University & International Business University

Learning Objectives

  • LO1: Describe price elasticity of demand, its relation to other demand elasticities, and its impact on sellers’ revenues.

  • LO2: Define price elasticity of supply and the links between production periods and supply.

Price Elasticity of Demand

  • Definition: Measures how quantity demanded (Qd) responds to price changes.

  • Types of Elasticity:

    • Elastic Demand: % change in Qd > % change in P.

    • Inelastic Demand: % change in Qd < % change in P.

    • Unit-Elastic Demand: % change in Qd = % change in P.

Perfect Elasticity

  • Perfectly Elastic Demand: Constant price; horizontal demand curve.

  • Perfectly Inelastic Demand: Constant Qd; vertical demand curve.

Revenue and Elasticity

  • Elastic Demand: Price change leads to total revenue change in the opposite direction.

  • Inelastic Demand: Price change leads to total revenue change in the same direction.

  • Revenue Behavior:

    • Elastic Demand: Up price, down revenue; down price, up revenue.

    • Inelastic Demand: Up price, up revenue; down price, down revenue.

Factors Affecting Price Elasticity of Demand

(A)

  • Portion of Income: Products that use less income tend to have inelastic demand.

  • Availability of Substitutes: More substitutes lead to elastic demand.

(B)

  • Necessities vs. Luxuries: Necessities tend to have inelastic demand, luxuries have elastic demand.

  • Time: Demand generally becomes more elastic over time.

Calculating Price Elasticity of Demand

  • Formula:

    • ed = ΔQd / average Qd / ΔP / average P

Elasticity and Linear Demand Curve

  • Elasticities Vary: Different price elasticity at different points on a linear demand curve.

  • High Prices: Demand is more elastic.

  • Low Prices: Demand becomes more inelastic.

Other Elasticities

  • Income Elasticity (ei): Measures Qd response to income changes.

    • Formula: ei = ΔQd / average Qd / ΔI / average I

  • Cross-Price Elasticity (exy): Measures Qd response to price changes of another product.

    • Formula: exy = ΔQd / average Qd / ΔPy / average Py

Price Elasticity of Supply

  • Definition: Measures how quantity supplied (Qs) responds to price changes.

  • Types of Elasticity:

    • Elastic Supply: % change in Qs > % change in P.

    • Inelastic Supply: % change in Qs < % change in P.

Factors Affecting Price Elasticity of Supply

  • Time Factor: Three stages influencing elasticity: immediate-run, short-run, long-run.

Time and Price Elasticity of Supply

  • Immediate Run: Supply is perfectly inelastic.

  • Short Run: Supply may be elastic or inelastic.

  • Long Run: Supply tends to be perfectly elastic in constant-cost industries and very elastic in increasing-cost industries.

Calculating Price Elasticity of Supply

  • Formula:

    • es = ΔQs / average Qs / ΔP / average P

Theoretical Perspective

  • Karl Marx’s Theory:

    • Product value derives from labor input.

    • Capitalists minimize wages while maximizing working hours.

    • Surplus value is the excess of revenues over costs.

Chapter Recap

  • Discussed price elasticity of demand, related elasticities, impacts on revenue, and price elasticity of supply linked to production periods.