ECON 1210 Tutorial

Chapter 5
Elasticity

Teaching Assistant : Fatile Joshua

Email: fatileaj@hku.hk
 Content
➢ Price Elasticity of Demand / Supply

➢ Determinants of Elasticity of Demand / Supply

➢ Cross Price Elasticity of Demand

➢ Income Elasticity of Demand

➢ Special Cases for Elasticity

 Price Elasticity of Demand / Supply
How much quantity
demanded/supplied
will change in
response to a change
in price

A demand/supply curve is elastic when an increase in price changes the

quantity demanded/supplied a lot.

A demand/supply curve is Unitary elastic when a 1% increase (decrease) in

price leads to a 1% decrease (increase) in the quantity demanded.

A demand/supply curve is inelastic when an increase in price changes the

quantity demanded/supplied just a little 3
 Determinants of Elasticity of Demand
Determinant Reason Effect
Availability of Less difficult for consumers to More substitute, more
substitutes switch to alternatives elastic.
Time horizon Longer time allow consumers Longer time, more
to switch their consumptions elastic
Classification of good Less specific category has less More specific
(broad or specific) substitutes (inelastic) classification, more
elastic
Nature of good Consumers are more sensitive Luxury, elastic
(necessity or luxury) to price change of luxury good
Share of budget Consumers are more sensitive Larger budget %, more
(purchase size) when the purchase occupies elastic
much of the budget
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 Determinants of elasticity of supply
Determinant Reason Effect
Change in per-unit The difficulty to produce additional Lower the additional
costs with increased units of product cost, more elastic
production
Time horizon Immediately following a price Longer time, more
increase, producers can expand output elastic
only by using their current capacity.
Share for market of The price of input will be greatly Smaller share, more
inputs altered if the producers are main elastic
players
Geographic Scope The wider the scope of the market of a Narrower scope, more
(wide or narrow) good, the less elastic its supply. elastic

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 Price Elasticity of Demand: Definition

General formular

Elasticity (mid-point method)

Point Price Elasticity of

Demand (when one point is
given)
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 Cross Price Elasticity of demand

Measures how sensitive the demand

of good A is to the price of good B

• For substitutes, the Cross-Price Elasticity of Demand is

positive.
When the price of y increases, the demand for x increases.

• For complements, the Cross-Price Elasticity of Demand is

negative.
When the price of y increases, the demand for x decreases.
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 Income Elasticity of Demand
Measures how sensitive the demand
for a good is to changes in income

• For normal goods, Income Elasticity is positive.

When income increases, demand for x increases.

• For luxury goods, Income Elasticity is greater than one.

Luxury, more elastic

• For inferior goods, Income Elasticity is negative.

When income increases, demand for x decreases.
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 Quick Prediction Formulas

Given the information about elasticities of demand and

supply, we can obtain the percentage change in quantity
using the quick prediction formula
 Special Cases for Elasticity
Supplied

(a) Perfectly Elastic Demand (b) Perfectly Inelastic Demand (c) Unitary Elastic Demand
Ed = - ∞ Ed = 0 Ed = -1
(a) Perfectly Elastic Supply (b) Perfectly Inelastic Supply (c) Unitary Elastic Supply
Ed = ∞ Ed = 0 Ed = 1
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Q1. 2022 Spring Q17 & 18

11
 Inferior & Normal Good

Normal Good:
• When income increases, demand for x increases.

Inferior Good:
• When income increases, demand for x decreases.
• E.g. instant noodles, 2nd hand good

→Hence x is an inferior good.

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 Complement & Substitute

Complements:
o When the price of y increases, the demand for x decreases.
o E.g. SUV and gasoline

Substitutes:
o When the price of y increases, the demand for x increases.
o E.g. tea and coffee

→ Hence x and y are complements.

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 2022 Spring Q17 & 18

Since the relation is in the natural log form, the Px, Py,
and income coefficient are their elasticity.

• PED of good X = - 1.30,

• Income elasticity of good X = -1.90

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 2023 Summer midterm Q35-36
Q2.

Q 35
QA = 609.8 − 3PA + 1.7PB - 2.8I
QA = 150, PA = 43 and PB = 36.

- Plug in the value of QA, PA, and PB into the equation to obtain the value of Income (I).
- Use the point elasticity of demand formula to find the income elasticity of demand for
product A.

QA = 609.8 − 3PA + 1.7PB - 2.8I n = (I/QA) x 1/slope

QA = 150, PA = 43 and PB = 36. I = 140, QA = 150, and 1/slope (differentiate
150 = 609.8 -3(43) + 1.7(36) - 2.8I, QA with respect to income) = - 2.8
150 = 609.8 – 129 + 61.2 - 2.8I
I = 140 n = (140/150) x - 2.8 = - 2.61
n = (PB/QA) x 1/slope
PB = 36, QA = 150, and 1/slope (differentiate QA with respect to PB) = 1.7

(36/150)*1.7 = 0.408
Q3. 2024 Spring midterm Q31 &32
P S0

P0 A
B
P1 C
D0
D1
Q1 Q0 Q
Q31 Q32
%dQd = (360/12000)*100 = 3% Since we have a change (decrease) in
nd = -1.5, ns = 1.77 and %dQd = 3 %, what quantity demanded, this will cause a
is %dQs = ? downward shift in the demand curve. We
can then find the change in quantity using
Using the quick prediction formula, the PES as
dP% = %Qd/ns +|nd|
dP% = 3 /(1.5 + 1.77)
ns = dQs%/dP%
dP% = 3/ 3.27
1.77 = %dQs /0.9174
dP% = 0.9174
%dQs = 1.77* 0.9174
If the quantity demanded decreases, then
the price will also decrease. dQt = %dQs = 1.6237
Q4. Revenue Maximization

A = (350, 33); B = (870, 7.4)

P = 50.23 – 0.05Q
Midpoint = 50.23/2 = 25.12

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 Features of Demand Curves
Assumptions: Given a linear and downwards sloping demand curves
P P
a η < −1 Above midpoint => elastic 10 PED on the common point E
At midpoint => η = −1 For line Y = - 2.5x +10
Below midpoint => inelastic PED = 2.5/3 *1/-2.5 = - 0.33
Elastic η = −1 η>-1
For line Y = - 0.5x +4
PED = 2.5/3 *1/-0.5 = - 1.67
a/2
η > −1 4
E
η<-1
Inelastic
Q 4 8 Q
b/2 b
• As Q increases (i.e., moving downwards on the demand curve), PED becomes less elastic
(True)
• If two linear demand curves run through a common point that is neither on X- axis nor the
Y-axis, at this common point of the two curves, the point on the steeper curve is always less
price elastic (True)
• The falter (black) demand curve is elastic => η < -1
• The stepper (Green) demand curve is inelastic => η > -1 19
 Features of Demand Curves
Assumptions: Given a linear and downwards sloping demand curves

If two linear demand curves run through a common point, then at any given quantity on
these two curves, the point on the steeper curve is always less price elastic. (False)

Explanation: Consider two linear demand curves with different slopes and a common
point. For each of the curves, all points above the midpoint are elastic, and all points below
the midpoint are inelastic.

The common point on these two demand curves may be above the midpoint for one curve and
below the midpoint for the other.
P P At this common
point, the PED of line
a η < −1 10 Da is inelastic, while
the PED of line Db is
elastic.
Elastic η = −1
Point B (Elastic)

a/2 Point A (Inelastic) common point

η > −1 4

Inelastic midpoint Da

Q 4 8 Q 20
b/2 b Db
 Features of Supply Curves
Assumptions: Given a linear and upwards sloping supply curves
P For a linear supply curve, with the equation P = a +
η>1 bQ, and the slope of b:
η = ∞ to 1 η=1 • When ”a” is zero (passing through the origin),
price elasticity of supply at any point (Qn,Pn) is
1(unitary price elastic).
η<1 • When ”a” is positive (positive y-intercept),
η = 0 to 1
price elasticity of supply at point (Qn,Pn) is
greater than 1 (price elastic).
a • When ”a” is negative (positive x-intercept),
price elasticity of supply at point (Qn,Pn) is less
than 1(price inelastic).
0 b Q
As Q increases, PES on a linear supply curve with a positive x-intercept/negative
y-intercept becomes more elastic (increasing from zero 0 to 1)

As Q increases, PES on a linear supply curve with a positive y-intercept/negative

x-intercept becomes less elastic (decreasing from infinity ∞ to 1)

Therefore, as Q increases, the PES on linear and upwards-sloping supply curves will
tend towards 1. 21
Q5. 2021 Fall midterm Q40

22
 Elasticity of Demand

False

• Demand would become less elastic as quantity increases

(consider the P/Q pairs as we move along the linear
downward-sloping demand curve).
True

Straight-line demand curve: η < −1

a
• Above midpoint => elastic
Elastic η = −1
• At midpoint => η = −𝟏
• Below midpoint => inelastic Price a/2
η > −1
Inelastic

b/2 b
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 Elasticity of Supply
True

• Elasticity increases as quantity increases for linear

supply curve that has a positive x-intercept.
True
η>1
P
η = ∞ to 1 • Note that PES becomes more elastic as Q increases for
η=1 a linear supply curve with a negative y-intercept.
η<1
η = 0 to 1 • Note that PES becomes less elastic as Q increases for a
linear supply curve with a positive y-intercept.
a
• Therefore, as Q increases, PES will tend towards 1.
0 b Q
Broadly speaking:
• any straight-line supply curve that intersects the vertical y-axis will be elastic and its
value will lie between infinity and one.
• a straight-line supply curve that intersects the horizontal x-axis will be inelastic and
its value will lie between zero and one.
• any straight-line supply curve through the origin will be unitary elasticity at any24 point
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a) Car is a normal good.
We are told only the price elasticity of demand for cars. We cannot infer whether a
good is normal or inferior without income elasticity of demand for the good.

b) The fraction of income spent on cars is small.

If the fraction of income spent on cars is small, people would be less concerned
with the price of cars, and thus, the demand for cars should be less elastic, not
more elastic.

c) There is a smaller incentive for people to look for a substitute for a car.
If there is less incentive for people to look for car substitutes, there will be fewer
car substitutes, and thus, the demand for cars should be less elastic.

d) There is a smaller incentive for people to look for a substitute for beef.
If there is a smaller incentive for people to look for substitutes for beef, there will
be fewer substitutes for beef, and thus, the demand for beef should be less elastic.

e) It takes a shorter time to find a close substitute for beef

if it takes a shorter time to find a close substitute for beef, people will have more
substitutes for beef, and thus, the demand for beef should be more elastic
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 Price elasticity of demand

• Fixed quantity demanded

• Any price change has no effect on
quantity demanded.
• Perfectly inelastic demand
• Tom’s price elasticity of demand = 0

o Total expenditure is fixed (P*Q = Constant)

o In other words, a 1% increase (decrease)
in price will lead to a one percent decrease
(increase) in quantity demanded.
o Unitary elastic demand
o Jerry’s price elasticity of demand = -1
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31
Elasticity (mid-point method)

32
Elasticity (mid-point method)

33
Elasticity (mid-point method)

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 Elasticity of Demand
X

Positive cross-price elasticity: the price of y increases, and

the demand for x increases.
X and Y are substitutes.

Negative cross-price elasticity: the price of y increases, and

the demand for x decreases.
X and Y are complements.
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Elasticity of Demand

36
 Elasticity of Demand

i. Fixed quantity demanded

• Perfectly inelastic demand (Ɛ = 0)

ii. Price decreases, Quantity demanded increases just a little

• Less elastic

iii. Price decreases, Quantity demanded increases a lot

• More elastic

iv. Price increases a little, Qd drops to zero

Price drops a little, Qd increase a lot
• Perfectly elastic demand (Ɛ = - ∞)

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Elasticity of Demand

38
2021 Fall midterm Q28

39
 Since Ps = MC(q) = 9q
• This means when q = 0, then MC = P = 0 and the supply curve will
have a zero(0) origin.
• The price elasticity of supply will always equal 1 at any point along
the straight-line supply curve that passes through the origin.
Therefore, Tom's price elasticity of supply will always be equal to 1.

• Since total expenditure is fixed (P*Q = Constant)

• Then, this means that a 1% increase (decrease) in price will lead to a
one percent decrease (increase) in quantity demanded, i.e., unitary
elastic demand. Therefore, Jerry’s price elasticity of demand = -1

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2021 Fall midterm Q41

41
 True

• (a) there are simply many more substitutes online and (b)
consumers have more time to look for substitutes for online
movies.
• Ultimately, the availability of substitutes is the most important
determinant when considering elasticity.
Avengers Online → more elastic

False

• For necessities, we do not change Q much when P changes

=> Necessities are less elastic demand
Pepsi → more elastic
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 True

The wider the scope of the category of a good, the less elastic the
good is. A narrower scope means more elastic.
Lettuce→ more elastic

True

The wider the scope of the category of a good, the less elastic the
good is. A narrower scope means more elastic.
Kit Kat chocolate bars → more elastic

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 Revenue Maximization

P = 80 – 2Q – 4I
When I = 10, then P = 40 – 2Q
Hence, the profit-maximizing price will occur at the mid-point of the
linear downward-sloping demand curve.
P = 40/2 = $20

The income elasticity of demand when When P = $20 and Q = 10

n = (I/QA) x 1/slope
The slope of the demand curve with respect to income is – 4 (the
coefficient of I in the vertical interpretation of the demand curve),
and 1/slope is - 2 (the coefficient of I in the horizontal interpretation
of the demand curve Q = 20 – 0.5P – 2I)
n = 10/10*(-2)
n=-2
 Quick Prediction Formulas

P S0

dP%

nd = -0.7, ns = 2.8 and %dQd = 4.4 %, what

D1b
is %dQs = ?
D1a D0
Using the quick prediction formula;
dP% = %Qd/ns +|nd| Q
dP% = 4.4 % /(2.8 + 0.7) ns = dQs%/dP%
dP% = 4.4% / 3.5 2.8 = %dQs /1.257
dP% = 1.257 dQt = %dQs = 3.52
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