Tutorial on Elasticities of Demand and Supply

Introduction

• Presented by Professor Watts
• Focus on calculating elasticities of demand and supply.

Definitions

Elasticity

• Responsiveness to change.
• Price Elasticity of Demand: How responsive quantity demanded is to a change in price.
  • Elastic: Quantity changes more than price (e.g., price up 50%, quantity down 90%).
  • Unit Elastic: Quantity and price change equally (e.g., price up 20%, quantity down 20%).
  • Inelastic: Quantity changes less than price (e.g., price doubles, quantity down 5-10%).

Examples

• Elastic: Rubber band (moves a lot with little force).
• Inelastic: Ruler (does not move with same force).
• Unit Elastic: Slight movement, e.g., fabric tie.

Elasticity Coefficients

• Measured with Greek letter Epsilon (ε).
  • Greater than 1: Elastic
  • Equal to 1: Unit Elastic
  • Less than 1: Inelastic

Calculating Elasticity

Basic Formula

• Percentage change in quantity demanded divided by percentage change in price.
• Elasticity is typically negative (absolute value used).

Example

• Price of oil up 10%, demand down 5% → Elasticity = -5/10 = -0.5 (use absolute value).

Problem with Percent Changes

• Different results based on start point (A to B or B to A).

Midpoint Method

• Use average (midpoint) to calculate percent changes.
• Formula:
  • ( \frac{\Delta Q}{\text{Average Q}} / \frac{\Delta P}{\text{Average P}} )

Sample Problems

Naval Oranges

• Price falls from $1 to $0.85, demand rises from 10k to 16k pounds.
• Elasticity = 2.88 (highly elastic).

Household Electricity

• Price rises from 6.8¢ to 8¢, demand falls from 300 to 290 kWh.
• Elasticity = 0.21 (inelastic).

Supply Elasticity

Potatoes

• Price from 25¢ to 30¢, quantity 5m to 10m pounds.
• Elasticity = 3.6 (elastic).

Apartments

• Rent from $1,000 to $1,200, units from 2,000 to 2,250.
• Elasticity = 0.136 (inelastic).

Consumer and Producer Surplus

Change in Consumer Surplus

• Use area of rectangles and triangles when price changes.

Change in Producer Surplus

• Similar calculation using supply curve changes.

Summary

• Elasticity captures sensitivity of quantity demanded to price changes.
• Elasticity visually represented by curve steepness (steeper = inelastic; flatter = elastic).
• Check Professor Watts' YouTube channel for more tutorials.