Elasticity SFLS

DEMAND (shifts)
= Less Demand at the same price
= More Demand at the same price
Elasticity by how much?
多少?
=
Changes in Demand without the price changing
Shift Left
Shift Right

Decrease Price
So if you own a
store, sell coke and
lower your price…

Decrease PriceA little more Customers…
Do you get…

Decrease Price
Or a lot more Customers?
Or…

A little Customers… Increase Price

Or a lot more Customers? Increase Price

Example Question:
You own a tea shop and sell your own specially made tea.
You sell about 5000kg of tea each month at about 70rmb for 1kg.
Your costs of producing this tea is rising, (as well as the
opportunity cost of your time) so you are considering raising
your price to 90rmb per kg.
The law of demand says if you raise your price you will sell less
tea, but the next question is by how much?
- Also how will this effect your actual revenue 收入?
- Will you make less profit or more profit?

Elasticity Textbook Definition:
Elasticity is a numerical measure of the
responsiveness of Qd or Qs to one of its
determinants.
Easier Definition:
Elasticity measures how much one variable
responds to changes in another variable.
It shows how much things will change due to
a change it the price.
Even Easier Definition:

Elasticity
4 Types of Elasticity:
1.) (PED) Price Elasticity of Demand
2.) (PES) Price Elasticity of Supply
3.) (XED)Cross Elasticity of Demand
4.) (YED)Income Elasticity of Demand
Drop the negative
sign ( - )
Do NOT drop the
negative sign ( -)

1.) (PED) Price Elasticity
of Demand
- is the measurement of how
demand for a good responds to a
change in price.
****easy way to remember equation:
Q before you Pay
Equation:
________% Q ________- Percent change in Quantity
- Percent change in Price
P%

Queuing 排队 Páiduì
Remember in
English not
Chinese

1.) (PED) Price Elasticity
of Demand
demand for a good responds to a
change in price.
*easy way to remember equation:
Q before you Pay
P%
We will only deal with absolute
values here, so when doing the
equation always drop the
negative sign (-)
Equation:

You own a tea shop and sell your own specially made tea. You
sell about 5000kg of tea each month at about 70rmb for 1 kg.
So if…
P = 70rmb and the Q = 5000kg
What is the Price Elasticity of Demand if after you change your
price, these are your shops new numbers…
Example Question:

% change in Q
(3000 – 5000)/5000 = I -40% I
% change in P
(90 – 70)/70 = 29%
The (PED) price elasticity of demand
equals
40%
29%
= 1.38
1.) P = 70rmb and the Q = 5000kg
Example Question:
________% Q
P%
________

Starbucks raising the price of it’s coffee from 30rmb to
50rmb and it’s sales decrease from 12 to 8 cups an hour.
so if…
P = 30rmb and Q = 12 cups
What is the Price Elasticity of Demand if Starbucks new
numbers are…
P = 50rmb and Q = 8 cups
Another Example Question:

Another Example Question:
1.) P = 30rmb and the Q = 12 cups
2.) P = 50rmb and the Q = 8 cups
% change in Q
(8 – 12)/12 = I -33% I
% change in P
(50 – 30)/30 = 67%
equals
33%
67%
= .5
% Q
P%
________

Ok so the answer
for the tea shop
question is 1.38
Ok so the answer
for the starbucks
question is .5
So what do these
numbers mean?

Demand is Elastic if it is greater than 1. ( > 1)
- a small change in price causes a relatively
large change in quantity demanded.
Demand is Inelastic if it is less than 1. ( < 1)
- a relatively larger change in price causes
a small change in quantity demanded.
Demand is Unit-Elastic if it is exactly 1. ( = 1)
- a change in price causes a proportional
change in quantity demanded.
Elasticity
Elastic
Inelastic
Unit-Elastic

1.38 is Elastic so a price
change has a large effect
on the quantity
.5 is Inelastic which means
the price change doesn’t
effect the quantity very much

1 RMB per can
Now only
0.9 RMB
After small price change…
Before price change…
= large number of more buyers
Demand is Elastic if it is greater than 1. ( > 1)
= normal amount of buyers
Elastic

D
P
Q
Small % change
Large % change
Demand is Elastic if it is greater than 1. ( > 1)Elastic
1 RMB per can
After small price change…
Now only
0.9 RMB

D
P
Q
Small % change
Large % change
1 RMB per can
Now 1.1 RMB
per can
Demand is Elastic if it is greater than 1. ( > 1)Elastic

2.5 RMB
Now
only .
2 RMB
After larger price
change…
= much few more buyers
= normal amount of buyers
Demand is Inelastic if it is less than 1. ( < 1)Inelastic

D
P
Q
Large % change
small % change
2.5 RMB
Now
only .
2 RMB
After larger price
change…

D
P
Q
Large % change
small % change
2.5 RMB
After larger price
change…
Now cost
3 RMB

P
Q
P
Q
P
Q
P
Q
P
Q
Perfectly
Elastic
Demand Elastic
Demand
Unit-Elastic
Demand
Inelastic
Demand Perfectly
Inelastic
Demand
Elastic if it is greater than 1
( > 1)
Inelastic if it is less than 1
( < 1)
Unit -Elastic if it is equal to 1
( = 1)

Slope and Elasticity is
NOT
the same thing!

Elasticity of a Linear Demand Curve
The slope
of a linear
demand
curve is
constant,
but its
elasticity
is not.
P
Q
$30
20
10
$0
0 20 40 60
200%
40%
= 5.0E =
67%
67%
= 1.0E =
40%
200%
= 0.2E =

Elasticity of a Linear Demand Curve
The slope
of a linear
demand
curve is
constant,
but its
elasticity
is not.
P
Q
$30
20
10
$0
0 20 40 60
Top part of a curve is
elastic > 1
Middle part is as close to unit
elastic as possible = 1
Bottom part of a
curve is Inelastic
< 1

Reasons or Influences of the
(PED) Price Elasticity of Demand
1.) Availability of Substitutes
2.) Good vs Luxury
3.) How narrow it is defined
4.) Time
4 reasons for Elasticity:

(PED) Price Elasticity of Demand
1.) Availability of Substitutes
2.) Good vs Luxury
3.) How narrow it is defined
4.) Time
To understand the determinants of price
elasticity, I will give you an examples for
each one.
Each compares two common goods.
In each example:
- Suppose the prices of both goods
rise by 20%.
- Note the difference in Quantities.

Reasons or Influences of the (PED)
1.) Availability of Substitutes - Price elasticity is higher when
close substitutes are available.
Sunscreen 防晒 vs. Breakfast cereal 早餐谷物
The prices of both rise by 20%.Example:
Sunscreen has no close substitutes,
so consumers would probably not buy
much less if its price rises.
Breakfast cereal has close substitutes
so buyers can easily switch if the price rises.
So it’s Elastic > 1So it’s Inelastic < 1

Insulin 胰岛素 vs. Vacation Cruises
To millions of diabetics 糖尿病, insulin is
a necessity.
A rise in its price would cause little or
no decrease in demand.
A cruise is a luxury. If the price rises,
some people will decide not to do it.
2.) Good vs Luxury - Price elasticity is higher for
luxuries than for necessities.

“Blue Jeans” 蓝色牛仔裤 vs. “Clothing”
For a narrowly defined good such as
blue jeans, there are many substitutes
(khakis, shorts, Speedos).
There are fewer substitutes available for
broadly defined goods.
3.) How narrow the market
is defined
- Price elasticity is higher for
narrowly defined goods
So it’s Elastic > 1 So it’s Inelastic < 1

Gasoline in Short Run vs. Gasoline in Long Run
There’s not much people can do in the
short run, other than ride the bus or
carpool.
In the long run, people can buy smaller cars
or live closer to where they work.
4.) Time -Price elasticity is higher in the long run than
the short run.
So it’s Inelastic > 1 So it’s Elastic < 1

Total Revenue and (PED) Price Elasticity of Demand

Total Revenue and (PED) Price Elasticity of Demand
Total Revenue - The total amount spent on the
of sales of a good or service.
Total revenue test Do the equation above before the
changes and after the changes are
made to compare if the outcome is
welcomed or not.
Equation:
Price × Quantity Sold
( P )× ( Q )

P
Q
D
50
8
B
30
12
A
Demand for coffee
Point A
30 x 12 = 360
Example Total Revenue Test

P
Q
D
50
8
B
30
12
A
Demand for coffee
Point A
30 x 12 = 360
Point B
50 x 8 = 400
The total revenue is increased
from 360 to 400. So an increase in
price led to more revenue since
the demand is inelastic, you can
raise your price and make more
money, though less people buy it.

P
Q
D
80
8
B
60
20
A
Demand for tea
Point B
80 x 8 = 640

P
Q
D
80
8
B
60
20
A
Demand for tea
Point B
80 x 8 = 640
Point A
60 x 20 = 1200
The total revenue is increased from
640 to 1200. So an decrease in price
led to more revenue since this
demand is elastic, you can lower your
price and make more money.

Elasticity and Total Revenue
When a seller raises the price of a good, there are two
countervailing 反补贴 effects in action:
Price Effect: - After a price increase,
each unit sold sells at a higher price,
which tends to raise revenue.
Quantity Effect: - After a price increase,
fewer units are sold, which tends to
lower revenue.
( More Inelastic)
( More Elastic )

Continuing our scenario, if you raise your price
from 70 to 90, would your revenue rise or fall?
Total Revenue =
A price increase has two effects on revenue:
1.) Higher P means more revenue on each unit you sell.
2.) But you sell fewer units (lower Q), due to Law of Demand.
Which of these two effects is bigger?
It depends on the Price Elasticity of Demand.
Example Question:
( P )× ( Q )

from 70 to 90, and quantity change from 5,000 to 3,000,
would your revenue rise or fall?
Before change: 70 x 5000 = 350,000 RMB
After change: 90 x 3000 = 270,000 RMB
Example Question:
So you would lose money if you raise
your price, the quantity effect is
stronger and your demand is Elastic

Increase in Price
In this case, the quantity effect is stronger than the price effect.
= Lower Total Revenue
Elastic

If the example was changed a little, a much bigger difference would
be found. For example, let’s say the increase of price from 70 to 90
only decreased quantity from 5,000 to 4,000
Before change: 70 x 5000 = 350,000 RMB
After change: 90 x 4000 = 360,000 RMB
Example Question Changed a little:
So you would gain more money if you
raise your price, and the price effect is
stronger and your demand is Inelastic

% change in Q
(4000 – 5000)/5000 = I -20% I
% change in P
(90 – 70)/70 = 29%
equals
20%
29%
= .69
Example Question:
________% Q
P%
________

Increase in Price
Elastic
Inelastic Increase in Price
In this case, the price effect is stronger than the quantity effect.
= Higher Total Revenue

Increase in Price
Elastic
Unit-Elastic Increase in Price
In this case, they offset each other and there is no gain
= No change in Total Revenue

Elasticity
4 Types of Elasticity:
1.) (PED) Price Elasticity of Demand
2.) (PES) Price Elasticity of Supply
3.) (YED)Income Elasticity of Demand
4.) (XED) Cross Elasticity of Demand
Drop the negative
sign ( - )
Do NOT drop the
negative sign ( -)

2.) (PES) Price Elasticity
of Supply
*easy way to remember equation:
Q before you Pay
P%
We will only deal with absolute
values here, so when doing the
equation always drop the
negative sign (-)
Equation:
supply for a good responds to a
change in price.

P
Q
P
Q
P
Q
P
Q
P
Q
Elastic if it is greater than 1
( > 1)
Unit -Elastic if it
is equal to 1
( = 1)
Inelastic
Supply
Perfectly
Inelastic
Supply
Inelastic if it is less than 1
( < 1)
Unit-Elastic
Supply
Perfectly
Elastic
Supply
Elastic
Supply

(PES) Price Elasticity of Supply
1.) Production Possibilities
or Availability of Inputs
2.) Storage Possibilities
or Time
Hurrah! only two this
time!

Corn vs. Beachfront Property
Corn becomes more profitable
A rise in its price would cause a rise in
the supply of land for corn
Even with a increase of price their isn’t much
more beachfront property to be had
available
1.) Production possibilities - Goods that are fixed quantity are inelastic
So it’s Elastic > 1 So it’s Inelastic < 1

Fresh Strawberries vs. Canned Fruit 水果罐头
Strawberries will become rotten and
cannot be stored for a long time, in the
short run, the price doesn’t change the
supply much
Canned fruit can last a long time and an
increase in prices will increase the supply,
particularly over the long term.
2.) Storage possibilities -Some things are almost impossible to store in the
short run, but over time, plans can change

3.) (XED) Cross
Elasticity of Demand
- It measures responsiveness of the
demand for a good to a change in
the price of a substitute or
complement
Equation:
Must keep the negative sign ( -) now!
Without it you cannot know the
answer!
____________% Q of A _____________
- Percent change in
Quantity of good A
- Percent change in
Price of good BP of B%

3.) (XED) Cross
complement
(I.) If it is a positive number then it is a substitute.
- Price of A and the Quantity of B move in the same direction.

Price of this goes up
i.) Substitute
Increase Demand of this
= Buy less of it
but more of this =
Price of this goes
down
Decrease Demand of this
= Buy more of this
but less of this =

Example Question:
If Coffee is a substitute for Tea, then if the price
of tea changes how much will that effect the
quantity of coffee?
P of coffee falls 10 %
Q of tea decrease 5%
- 5%
- 10%
= .5________% Q of A
P of B%

The (XED) for a substitute is positive.
Example: Coffee is a substitute for Tea.
A fall in the price of
Coffee
= Lower Demand for
Tea
*** Same is true for the reverse ***

3.) (XED) Cross
complement
(II.) If it is a negative number then it is a complement.
- Price of A and the Quantity of B move in the opposite direction.

Price of this goes up
Decrease demand of this
= Buy less of it
and buy less
of this =
Price of this goes down Increase demand of this
= Buy more of it
and buy more
of this =
(the price of this didn’t change)i.) Complement

Example Question:
If sugar is a complement for coffee, then if the
price of coffee changes how much will that
effect the quantity of sugar?
P of coffee falls 10 %
Q of sugar increases 2%
________% Q of A
P of B%
2%
- 10%
= -.2

The (XED) for a complement is negative.
Example: Sugar is a complement for Coffee.
A fall in the price of
Coffee
= Higher Demand
for Sugar
*** Same is true for the reverse ***

4.) (YED) Income
- A measure of the extent to
which the demand for a good
changes when income changes
measuring whether good is
normal or inferior.
Equation:
Must keep the negative sign ( -) now!
Without it you cannot know the
answer!
____________% Q ____________- Percent change in Quantity
- Percent change in IncomeIncome%

4.) (YED) Income
normal or inferior.
(I.) If increased income means more demand then it is a
normal good and is positive number.
The quantity demanded of a good and income of it change in the
same direction.

Income
Increase
i.) Normal good
Demand increasesBuy more of this at
the same price
Income
Decrease
Demand decreasesBuy less of this at the
same price

4.) (YED) Income
normal or inferior.
(II.) If increased income means less demand then it is an
inferior good and is negative number.
The quantity demanded of a good and income of it change in the
opposite direction.

Income
Increase
Demand decreaseBuy less of this at
the same price
Income
Decrease
Demand increasesBuy more of this at
the same price
ii.) Inferior good

So to Summarize all of it now…

(PES) Price Elasticity of Supply
1.) Production Possibilities
or Availability of Inputs
2.) Storage Possibilities
or Time

Unit-Elastic Increase in Price
In this case, they offset each other and there is no gain
= No change in Total Revenue
Increase in Price
= Lower Total RevenueElastic

That’s all
The End.
Thanks


Elasticity SFLS

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Elasticity SFLS