Académique Documents
Professionnel Documents
Culture Documents
Price Elasticity is similar to slope of the demand or supply curve. Is it more flat or vertical?, or how
flexible is quantity when price changes?, does it change a little or a lot?
Price Elasticity - how much supply or demand Quantity (Q) changes in reaction to Price (P) changes
ES/D = (% change in Q) = )Q/Q
(% change in P)
)P/P
For demand elasticity ED - absolute value |E| used since a negative ratio.
More Elastic - quantity is more sensitive, or changes more, for an identical price change.
E=0
E<1
E=1
E>1
E=4
p. 2
Time - Longer market time periods have higher supply and demand price elasticities, shorter time
periods are more inelastic. [Quantity supplied or demanded is for a certain time period ...
could be day, week, month, year; for longer time periods, supply and demand are more elastic.]
Why? - More substitutes to consume/produce over longer time periods, so more elastic.
E.g. Demand - Home heating oil prices rise (fall),
short-run: few alternatives of which to consume more (or less);
long-run: switch to gas or electric heat (or oil for those using gas or electric), replace furnace.
E.g. Supply - Milk prices rise (fall) for dairy farmers,
short-run: higher production limited by herd size (few alternatives to otherwise produce);
long-run: breed more dairy cows (switch to pig production)
E.g. Supply - Gold prices rise (fall),
short-run: higher production capacity limited by existing mines (no alternative production with
existing capital);
long-run: explore, open new mines (switch to silver or oil production)
E.g. Supply - Residential Housing prices rise (fall),
short-run: supply fixed, cannot build new houses in a week (or switch production to building
office buildings); [if demand rises and supply is vertical, in short-run prices spike.]
long-run: build new houses, profitability attracts new construction companies (switch to
produce office buildings instead of housing)
p. 3
OTHER ELASTICITIES:
Applications:
!
Large/Low Crop Yields - If a certain food has an Inelastic Demand, a low (high) yield or Quantity
produced drives up (down) Price and Total Revenue (PxQ) for market sellers for a small change in
supply. [This is an application of the Total Revenue Test]
(Ironic, a drought can make farmers better off, a bumper crop can make farmers worse off.)
Commodity spot and futures markets for inelastically demanded items such as orange juice and
coffee react quickly with a price spike to a freeze killing crops in anticipation of result on price.
Taxes - taxes on elastically demanded items have a large impact quantity demanded and tax increases
may raise little additional revenue for elastically taxed items, e.g. cigarettes near a state border since
substitutes exist (buy over border), a doubling of tax rates will less than double tax revenues since less
is purchased at higher after tax cost and tax revenue can even fall with higher tax rates. (And aside
this can cause more allocative inefficiency MC MB relative to low elastic goods taxed.)