Economics 213

Topic (2)
Dr. Mahmoud A. Arafa
Assistant Professor of Agricultural Economics, Cairo University
[email protected]

Source of this Material: RobeRt S. Pindyck and daniel l. Rubinfeld (2018) Microeconomics. 9th edition. Global Edition.
Available at:
https://www.pdfdrive.com/download.pdf?id=188702641&h=b6cf884b5e1c4a29aca6f3333956c402&u=cache&ext=pdf
 Elasticities of Supply and Demand

Elasticity: Percentage change in one variable resulting

from a 1-percent increase in another.

𝛥%𝑄 𝛥Q/𝑄 𝛥Q ∗ 𝑃 𝑄2 − 𝑄1 𝑃1
𝐸𝑝 = = = = ∗
𝛥%𝑃 𝛥𝑃/𝑃 𝛥𝑃 ∗ 𝑄 𝑃2 − 𝑃1 𝑄1
 Types of Elasticities
Elasticity

Supply Demand

Price Income Cross

Elastic positive positive

Inelastic negative negative

perfectly elastic Zero Zero

perfectly inelastic

unit elastic
 Elasticity Can be Calculated As …

P
Point
𝑄2 − 𝑄1 𝑃1
𝐸𝑝𝑜int = ∗
𝑃2 − 𝑃1 𝑄1
𝐸𝑝𝑜int = 𝐸1
𝑃2
Between two points
𝑄2 − 𝑄1 𝑃ത 𝑃1
𝐸𝐴𝑟𝑐 = ∗
𝑃2 − 𝑃1 𝑄ത D
As Percentage
%𝛥𝑄 Qd
𝐸𝑝𝑜int = 𝑄2 𝑄1
%𝛥𝑃
 Types of Price Elasticity of Demand

Types of Price Elasticity of Demand

Perfectly Perfectly Relatively Relatively Unitary

Elastic Inelastic Elastic Inelastic Elastic
Types of Price Elasticity of Demand

E = infinity ➔ perfectly elastic

Types of Price Elasticity of Demand

E=0 Perfectly inelastic

Types of Price Elasticity of Demand

E>1 but les than infinity ➔elastic

Types of Price Elasticity of Demand

0<E<1 ➔ inelastic
Types of Price Elasticity of Demand

E = 1 ➔ unitary elastic
 Or
2
𝐸𝑝𝑜𝑖𝑛𝑡 = −2 ∗ 𝑄𝑑 = 8 − 2P
0
 Or
2
𝐸𝑝𝑜𝑖𝑛𝑡 = −2 ∗ 𝑄𝑑 = 8 − 2P
0

0
𝐸𝑝𝑜𝑖𝑛𝑡 = −2 ∗
8
 Or
2
𝐸𝑝𝑜𝑖𝑛𝑡 = −2 ∗ 𝑄𝑑 = 8 − 2P
0

3
𝐸𝐴𝑅𝐶 = −2 ∗ = -1
6

0
𝐸𝑝𝑜𝑖𝑛𝑡 = −2 ∗
8
 Practice

Calculate Price Elasticity of Demand at:

P
Point
Arc
Percent
10

Qd
3 15
 Point Elasticity
𝜟%𝑸 𝑸𝟐 − 𝑸𝟏 𝑷𝟏
𝑬𝒑𝒐𝐢𝐧𝐭 = = ∗
𝜟%𝑷 𝑷𝟐 − 𝑷𝟏 𝑸𝟏 P

𝟑 − 𝟏𝟓 𝟑
= ∗
𝟏𝟎 − 𝟑 𝟏𝟓
−𝟏𝟐 𝟑
= ∗
𝟕 𝟏𝟓 10
−𝟑𝟔
= 3
𝟏𝟎𝟓
= | − 𝟎. 𝟑𝟒𝟑| = 𝟎. 𝟑𝟒𝟑 < 𝟏 D

E<1 ➔inelastic 3 15
Qd
 Arc Elasticity

%Q Q 2 − Q 1 P 3 − 15 (3 + 10) / 2 −12 6.5 −78

E Arc = = * = * = * = = −1.238 = 1.238  1
% P P2 − P1 Q 10 − 3 (15 + 3) / 2 P 7 9 63

E>1 ➔Elastic 10

Qd
3 15
 Percentage
%Q (Q 2 − Q 1 ) / Q 1 (3 − 15) /15 −12 /15 −0.80
E% = = %= %= %= % = −34.3 % = 34.3%  100%
% P (P2 − P1 ) / P1 (10 − 3) / 3 7/3 0.33
P

E<100 ➔inelastic 10

Qd
3 15
 Income Elasticity of Demand

income elasticity of demand Percentage change in the

quantity demanded resulting from a 1-percent increase in
income.
• demand is the percentage change in the quantity demanded, Q,
resulting from a 1-percent increase in income I:
• Positive Result ➔Normal Good
• Negative Result ➔Inferior Good
 Calc. Income Elasticity of Demand

If Qd=2600, I=1000, and Demand Function

is: Qd = 20 – 0.85P + 0.6 I
Calculate Income Elasticity of Demand?
Answer:
𝛥𝑄𝑑 𝐼
𝐸𝐼 = ∗ = 0.6 ∗ 1000Τ2600 = 0.231
𝛥𝐼 𝑄𝑑
 6
Qd P 5
30 1 4
20 2

inelastic
3
15 3 2
10 4 1
7 5 0
0 10 20 30 40
 Point Elasticity Calculations
(you can Calc. arc Elasticity)

Qd P Ep How?
30 1 NA
20 2 -0.3 inelastic
15 3 -0.5 inelastic
10 4 -1 Unitary Elast.
7 5 -1.2 elastic
 Income Elasticity Calculations

Qd I How
20 100 ---
12 80 2
10 120 -0.3

Inferior
8 140 -1.2
6 150 -3.5
 𝜟%𝑸𝒅
𝑬𝑰 = = 𝟏. 𝟏
𝜟%𝑰
𝜟%𝑸𝒅
𝑬𝑰 = = 𝟏. 𝟏 ⇒ 𝜟%𝑸𝒅 = −𝟐. 𝟓 ∗ 𝟏. 𝟏 = −𝟐. 𝟕𝟓%
−𝟐. 𝟓
 Elasticity and Equilibrium

Which curve is more elastic?

P P S1
B
A S2

D1

D2

Qd Qs
 Short-run versus long-run elasticities

If we ask how much demand or supply changes in

response to a change in price, we must be clear about
how much time is allowed to pass before we measure
the changes in the quantity demanded or supplied.
If we allow only a short time to pass—say, one year or
less—then we are dealing with the short run. When we
refer to the long run we mean that enough time is
allowed for consumers or producers to adjust fully to the
price change.
In general, short-run demand and supply curves look
very different from their long-run counterparts.

demand for
gasoline is much Un-durable
more price elastic Goods

in the long run

than in the short
run
‫الفكرة األساسية ان المستهلك مش بيقدر يعدل سلوكه االستهالكى في الوقت الحالي لما سعر البنزين يرفع‬
‫ لكن بعد فترة بيغير الكمية المستهلكة استجابة لتغير السعر‬،‫فجأة ألنه مش عنده كمية بنزين مخزنة‬
Why the demand for gasoline is much more
elastic in the long run than in the short run?
A sharply higher price of gasoline reduces the
quantity demanded (somewhat) in the short run by
causing motorists to drive less, but it has its
greatest impact on demand by inducing consumers
to buy smaller and more fuel-efficient cars.
 Demand for Durabiles
• For some goods just the opposite is true—demand is
more elastic in the short run than in the long run.
Because these goods (automobiles, refrigerators,
televisions, or the capital equipment purchased by
industry) are durable, the total stock of each good
owned by consumers is large relative to annual
production.
• As a result, a small change in the total stock that
consumers want to hold can result in a large percentage
change in the level of purchases.
demand for
durable Goods is
much more price
elastic in the short
run than in the
long run
 Cross Elasticity

Cross Elasticity: Percentage change in Quantity Supplied of

Good X resulting from a 1-percent increase in Price or other
factors, of the good Y.

Positive ➔Substitutes
Negative ➔Complements
 Cross Elasticity

Cross Elasticity: Percentage change in Quantity Supplied

resulting from a 1-percent increase in Price, Technology, or
Production Cost (Input Prices).
%Q X Q 2X − Q 1X
PY
E Arc = = Y *
% PY P2 − P1 Q X
Y

%Q X Q 2X − Q 1X
P1 Y
%Q X (Q 2X − Q 1X ) / Q 1X
E po int = = Y * Y E% = = Y %
% PY P2 − P1 Q1
Y
% PY (P2 − P1 ) / P1
Y Y
 %Q X %Q X
E Cross = = = −0.3
% PY −15
%Q X = −15* −0.3 = +4.5
30- Suppose the demand curve for a product is given by Q =
10 - 2P + PS, where P is the price of the product and PS is the
price of a substitute good. The price of the substitute good is
$2.00.
a) Suppose P = $1.00. What is the price elasticity of demand?
What is the cross-price elasticity of demand?
b) Suppose the price of the good, P, goes to $2.00. Now what
is the price elasticity of demand? What is the cross-price
elasticity of demand?
 Elasticity Of Supply

Elasticity of Supply: Percentage change in Quantity Supplied

of Good X resulting from a 1-percent increase in Price,
Technology, Production Cost, or other factors in Good X
itself .
 Elasticity Of Supply

Elasticity of Supply: Percentage change in Quantity Supplied

resulting from a 1-percent increase in Price, Technology, or
Production Cost (Input Prices).
%Q s Q 2 − Q 1 P
s s

E Arc = = s *
% P P2 − P1 Qs

 %Q s Q 2 − Q 1 P1 s
s s

E po int = = s * s %Q s (Q 2 − Q 1 ) / Q 1
s s s

% P P2 − P1 Q1s
E% = = %
% P (P2 − P1 ) / P1
 Elasticity Of Supply

17-The price elasticity of gasoline supply in the U.S. is

0.4. If the price of gasoline rises by 8%, what is the
expected change in the quantity of gasoline supplied in
the U.S.?
%Q s
A) +3.2% Es = = 0.4 
% P
B) -3.2% %Q s
C) +32.0% = 0.4 
8
D) +0.32% %Q = +3.2
s
Elasticities of supply
also differ from the
long run to the short
run. For most
products, long-run
supply is much more
price elastic than short-
run supply
In Short-Run Firms face capacity constraints in the
short run and need time to expand capacity by
building new production facilities and hiring
workers to staff them.
 Supply and Durability

For some goods, supply is

more elastic in the short run
than in the long run. Such
goods are durable and can be
recycled as part of supply if
price goes up. An example is
the secondary supply of metals:
the supply from scrap metal
<
>
<
In case of shifting supply curve to the right. The higher elasticity of
demand, the lower fall in equilibrium prices.
P P

S1
Lower Elastic Higher Elastic S1
S2 S2

P0 P0
P1
P1
D1

D2
Qd,s Qd,s
In case of shifting supply curve to the Left. The higher elasticity of
demand, the lower raise in equilibrium prices.
P P

S2
S1 S2
S1
Lower Elastic
Higher Elastic
P2
P2
P1 P1
D

D
Qd,s Qd,s
In case of shifting Demand curve to the right. The higher elasticity of
supply, the lower raise in equilibrium prices.
P P

S
Lower Elastic
S
P1 Higher Elastic
P1
P0 P0
D2
D1 D2 D1
Qd,s Qd,s
In case of shifting Demand curve to the Left. The higher elasticity of
supply, the lower Fall in equilibrium prices.
P P

S
Lower Elastic S
Higher Elastic
P0 P0
D1 D1
P1
P2 D2
D2

Qd,s Qd,s
understanding and predicting the effects of
Changing Market Conditions
shift and thereby affect market price and quantity. Let’s begin with the linear
curves shown in Figure below We can write these curves algebraically as
follows:
Demand: 𝑄𝑑 = a – bP
Supply: 𝑄𝑠 = c + dP
 How to choose numbers for the constants a, b, c,
and d?
Step#1 Since Price Elasticity E = (P/Q)(𝛥Q/𝛥P) For each S
and D.
(𝛥Q/𝛥P) = Constant for linear line equal to: [-b] for D or [+d]
for S Function. Since: Demand: Q = a – bP Supply: Q = c +
dP
substitute these values for (𝛥Q/𝛥P) into the elasticity
formula:
Demand: Ed = -b(P*/Q*) Supply: Es = +d(P*/Q*)
where P* and Q* are the equilibrium price and quantity
Step 2: Since we now know b and d, we can substitute
these numbers, as
well as P* and Q*, into equations: Demand: Q = a – bP
and Supply: Q = c + dP and solve for a and c

a = Q* + bP* c = Q* – dp*
 Example
long–run supply and demand for the world copper market. The
relevant numbers for this market are as follows
➢ Quantity Q* = 18 million metric tons per year (mmt/yr)
➢ Price P* = $3.00 per pound
➢ Elasticity of suppy ES = 1.5
➢ Elasticity of demand ED = -0.5.
(The price of copper has fluctuated during the past few decades
between $0.60 and more than $4.00, but $3.00 is a reasonable
average price for 2008–2011).
 Solution
We begin with the supply curve equation Supply: Qs = c + dP and
use our two-step procedure to calculate numbers for c and d.
❑ The long-run price elasticity of supply is:
Es = 1.5, P* = $3.00, and Q* = 18,
Step 1: Substitute these numbers in equation to determine d:
Es=d(P/Q) ➔1.5 = d(3/18) = d/6➔ so that d = (1.5)(6) = 9.
Step 2: Substitute this number for d, together with the numbers
for P* and Q*, into equation below to determine c:
Qs = c + dP ➔18 = c + (9)(3.00) = c + 27➔ so that c = 18 - 27 = -9.
We now know c and d, so we can write our supply curve: Qs = -9 + 9P
Follow the same steps for the demand curve equation: Qd = a – bP
An estimate for the long-run elasticity of demand is: Ed= -0.5,
First, substitute this number, as well as the values for P* and Q*, into
equation below to determine b:
Ed=-b(p/Q)➔-0.5 = -b(3/18) = -b/6➔ so that b = (0.5)(6) = 3.
Second, substitute this value for b and the values for P* and Q* in
equation below to determine a:
Qd=a-bP➔18 = a - (3)(3) = a – 9➔ so that a = 18 + 9 = 27.
Thus, our demand curve is: Qd = 27 - 3P
 Check your Answer
To check that we have not made a mistake, let’s set the
quantity supplied equal to the quantity demanded and
calculate the resulting equilibrium price:
Supply = -9 + 9P = 27 - 3P = Demand➔9P + 3P = 27 + 9
or P = 36/12 = 3.00, which is indeed the equilibrium price
with which we began.
• Demand might depend on income as well as price. We
would then write demand as: Qd = a - bP + fI
where I is an index of the aggregate income or GDP. I
might equal 1.0 in a base year and then rise or fall to
reflect percentage increases or decreases in aggregate
income.
• For our copper market example, a reasonable estimate
for the long-run income elasticity of demand is 1.3.
For the linear demand curve: Above.
• we can then calculate (Income Elasticity, f) by
using the formula for the income elasticity of
demand: Ed,I = (I/Q)(ΔQ/ΔI). Taking the base value
of I as 1.0, we have 1.3 = (1.0/18)( f ).➔ Thus f =
(1.3)(18)/(1.0) = 23.4.
• Finally, substituting the values b = 3, f = 23.4, P =
3.00, and Qd = 18 into equation: Q = a - bP + fI
we can calculate that a must equal 3.6.
With Best Wishes