Elasticities

of Supply and
Demand
Mineral Economics
214D6223
Whats is
Elasticity?
Elasticity is a measure
of how either supply
or demand responds
to a change in price
Elasticity of Demand
This Photo by Unknown Author is licensed under CC BY-SA
 Elasticity of demand

When the price of a good increases, individuals and

businesses will buy less. But how much less?

Elasticity of demand refers to the sensitiveness or

responsiveness of quantity demanded of a good to a change
in its own price, income and prices of related goods
 Elasticity of
Demand

Elasticity rule: If two linear

demand (or supply) curves
run through a common
point, then at any given
quantity the curve that is
flatter is more elastic.

Source: Cowen and Tabarrock. 2013. Modern Principles of Economics.

Which do you think
would best
represent then
demand curve for
oil?
The More and the Better the
Substitutes, the More
Elastic the Demand
Some Factors Determining the Elasticity of Demand

Less Elastic More Elastic

Fewer substitutes More substitutes

Short run (less time) Long run (more time)

Categories of product Specific brands

Necessities Luxuries

Small part of budget Large part of budget

Availability of Subtitutes
• One of the most important factors likely to influence the price elasticity of demand for a commodity or service
is whether or not substitutes are available. If a commodity has many close substitutes, its demand is likely to
be elastic.

Nature of Commodity
• Whether the commodity is a luxury or a necessity has some effect on its price elasticity of demand. In general,
necessities are price inelastic. If the price of a basic necessity increases, say by 10%, quantity demanded will
not probably fall by that proportion.

Time Period
• The time period being considered will also have some effect on the elasticity of demand for the product. In
general, the longer the time period being considered, the more elastic the demand is likely to be.

Number of uses
• In general, the greater the number of uses of a commodity has, the more price elastic the demand for that
commodity is likely to be. A decrease in the price of a commodity that has large number of uses (milk, for
example) more of it will be bought to allocate to different uses.

Proportion of income spent on the commodity

• Another factor that is likely to affect price elasticity of demand is the proportion of income spent on the
commodity. If only a negligible percentage of consumer‘s income is spend on the commodity, the demand for
that commodity is likely to be inelastic. An increase in the price of such commodity has no appreciable effect
on the consumer‘s budget.
Calculating The %∆𝑄
Elasticity of 𝐸𝑑 =
%∆𝑃
Demand
Denoting ΔQ for change in quantity 𝑂𝑟,
demanded and ΔP for the change in
price.
∆𝑄 𝑃
𝐸𝑑 = ×
∆𝑃 𝑄
Elastic Demand
%ΔQ > %ΔP
(|Ed| > 1)
Inelastic Demand
%ΔQ < %ΔP
(|Ed| < 1)
Unitary Elastic
Demand

%ΔQ = %ΔP
(|Ed| < 1)
Perfectly Elastic
Demand
Buyers are prepared to buy
all they can at some price
and none at all at higher
prices.

(|Ed| = ∞ )
Perfectly Inelastic
Demand
When quantity demanded
does not change as a result
of change in price

(|Ed| = 0)
Summary of Elasticity of Demand
Example 1
The price of marble fell from $ 560 to $ 540 while the quantity
demanded increased from 80 tons to 100 tons.

Q1 = 80, Q2 = 100
∆𝑄 𝑃
𝐸𝑑 = ×
P1 = 560, P2 = 540 ∆𝑃 𝑄
100 − 80 560
𝐸𝑑 = ×
540 − 560 80 𝐸𝑑 = 7
−20 560 𝐸𝑑 > 1, 𝐸𝑙𝑎𝑠𝑡𝑖𝑐
𝐸𝑑 = × =7
−20 80
Example 2
Total demand for coal fell from 500 tonnes to 490 tonnes. This
symptom was the result of the price increase from Rp.50,000 to
Rp.51,000.

∆𝑄 𝑃
Q1 = 500, Q2 = 490 𝐸𝑑 = ×
P1 = 50.000, P2 = 51.000 ∆𝑃 𝑄
490 − 500 50.000
𝐸𝑑 = × |𝐸𝑑 | = 0,07
51000 − 50000 500
−10 560 𝐸𝑑 < 1, 𝐼𝑛𝑒𝑙𝑎𝑠𝑡𝑖𝑐
𝐸𝑑 = × = −0,07
1000 80
Cross Elasticity of demand

The responsiveness or sensitiveness of quantity

demanded of one commodity to the changes in
the price of another commodity is called cross
elasticity of demand
 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑋
𝐸𝑐 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑌

Calculating The
Cross Elasticity ∆𝑄𝑥 1/2(𝑃𝑦1 + 𝑃𝑦2)
of Demand 𝐸𝑐 = ×
∆𝑃𝑦 1/2(𝑄𝑥1 + 𝑄𝑥2)
Example
If the oil price has increased from Rp. 40,000 to Rp. 45,000,
then the demand for coal will increase from 2000 tonnes to 2300
tonnes. What is the coefficient of cross elasticity?

∆𝑄𝑥 1/2(𝑃𝑦1 + 𝑃𝑦2) 2300 − 2000 1/2(40000 + 45000

𝐸𝑐 = × 𝐸𝑐 = ×
∆𝑃𝑦 1/2(𝑄𝑥1 + 𝑄𝑥2) 45000 − 40000 1/2(2000 + 2300)

300 42500
𝐸𝑐 = × = 1,18, 𝑐𝑟𝑜𝑠𝑠 𝑒𝑙𝑎𝑠𝑡𝑖𝑐 𝑑𝑒𝑚𝑎𝑛𝑑
5000 2150
Income Elasticity of Demand

The responsiveness or sensitiveness of quantity

demanded of a commodity to changes in income
of the consumer is termed as income elasticity of
demand.
 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑐 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒

Calculating The ∆𝑄 𝑌
Income Elasticity of 𝐸𝑐 = ×
∆𝑌 𝑄
Demand
Example
An increase in a person's income from $200 to $300 results in
an increase in the number of goods X demanded from 10 units
to 16 units. How big is the income elasticity?

∆𝑄 𝑌 16 − 10 200
𝐸𝑐 = × 𝐸𝑐 = ×
∆𝑌 𝑄 300 − 200 10

6 200
𝐸𝑐 = × = 1,2
100 10
Elasticity of Supply
 Elasticity of Supply

When the price of a good like oil increases, suppliers

will increase the quantity supplied, but by how much?

The elasticity of supply measures how responsive the

quantity supplied is to a change in price
 Elasticity of
Supply

Elasticity rule: If two linear

demand (or supply) curves
run through a common
point, then at any given
quantity the curve that is
flatter is more elastic.

Source: Cowen and Tabarrock. 2013. Modern Principles of Economics.

Which do you think
would best
represent the
supply curve for oil?

If increased production
requires much higher per-
unit costs, then supply will
be less elastic—or inelastic.
Some Factors Determining the Elasticity of Supply

Less Elastic More Elastic

Difficult to increase production at Easy to increase production at
constant unit cost constant unit cost (e.g., some
(e.g., some raw materials) manufactured goods)

Large share of market for inputs Small share of market for inputs

Global supply Local supply

Short run Long run

 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑦
𝐸𝑠 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

Calculating The %∆𝑄

Elasticity of 𝐸𝑠 =
%∆𝑃
Supply
Denoting ΔQ for change in quantity
Suplied and ΔP for the change in
𝑂𝑟,
price.

∆𝑄 1/2(𝑃1 + 𝑃2)
𝐸𝑠 = ×
∆𝑃 1/2(𝑄1 + 𝑄2)
Elastic Supply
%ΔQ > %ΔP
(|Es| > 1)
Inelastic Supply
%ΔQ < %ΔP
(|Es| < 1)
Unitary Elastic Supply

%ΔQ = %ΔP
(|Es| < 1)
Perfectly Elastic
Supply
At any given price
infinite quantity is
supplied

(|Es| = ∞ )
Perfectly Inelastic
Supply
When the quantity supplied
of a commodity does not
change at all in response to
the change in price,
elasticity of supply is said to
be perfectly inelastic.

(|Es| = 0)
Example 1
The increase in the price of goods X from $200 to $250 led to an
increase in the number of goods being offered from 150 units to
200 units. Determine the elasticity of supply?

Q1 = 150, Q2 = 200 ∆𝑄 1/2(𝑃1 + 𝑃2)

P1 = 200, P2 = 250 𝐸𝑠 = ×
∆𝑃 1/2(𝑄1 + 𝑄2)
200 − 150 1/2(200 + 250) −50 225
𝐸𝑠 = × = × = −1,28
250 − 200 1/2(150 + 200) 50 175

|Es|=1,28,|Es|>1 elastic supply

Example 2
The price of sand has increased from $ 300 to $ 350. This symptom was also followed by
an increase in supply from 6000 to 7000. Determine the elasticity of supply?

Q1 = 6000, Q2 = 7000 ∆𝑄 1/2(𝑃1 + 𝑃2)

P1 = 300, P2 = 350 𝐸𝑠 = ×
∆𝑃 1/2(𝑄1 + 𝑄2)
7000 − 6000 1/2(300 + 350) 1000 325
𝐸𝑠 = × = × =1
350 − 300 1/2(6000 + 7000) 50 6500

|Es|=1,|Es|=1 unitary elastic supply