Elasticity & case studies

1- Price elasticity of demand

1- What is Ed?
2- How to calculate Ed?
3- Different values of Ed & shapes of
Demand curves.
4- Relation between changes in price,
changes in revenues & Ed.
5- What determines Ed?
What is Ed?
It is a measure that shows how the %
change in quantity demanded of a product
RESPONDS to the % change in the price of
the product itself, other factors being
constant.
How to measure Ed?
Ed= % change in Qdx / % change in Px
Ed=change in Q/change in P . P/Q
Example: If the quantity demanded of a
certain product increased by 80% when its
price fell by 20%, calculate Ed. What does
the value show?
Ed=+80%/-20%= -4(every 1% change in
P yields 4% in Q , in the inverse direction)
Another example
Calculate Ed from the following table using the
point elasticity of demand, the original situation
was ( A):
P Q
A)100 100
B)90 140
Ed= 40/-10 . 100/100=-4( notice that addressing
the absolute value, Ed is more than unity, ie %
change in Q RESPONDS GREATLY to % change in
P.
3-Different values of Ed & shapes of
demand curves
1-Ed might be Zero.Demand is PERFECTLY
INELASTIC
Meaning: Qd does not respond whatsoever to P
changes. The Qd remains constant , regardless of
price changes.
Example: Vital necessities with no substitutes.
Demand curve is vertical as seen in the following
diagram:
Shape of PERFECTLY INELASTIC
Demand curve:
It is vertical:
2-Ed= infinity
Demand for the product is perfectly elastic.
Meaning: consumers are ready to buy an infinite
quantity at a certain price & none at all at a
slightly higher price.
Example: Very luxurious products with endless
number of substitutes( the product is not
important whatsoever for the consumer
Demand curve will be horizontal as follows:
Shape of a perfectly elastic demand
curve.
It is horizontal:
3-Ed=1
Demand is of unit elasticity.
Meaning:% change in Qd =% change in P
Demand curve takes shape of a
rectangular hyperbola( area under the
curve which reflects REVENUE is always
constant) as follows:
A demand curve of unit elasticity
Revenues are always constant under the
curve:
4- Ed is more than unity(Demand is
elastic)
Meaning: % change in Q exceeds % change in P
Example: when price rises by 10%, Quantity falls
& responds greatly , by 50%( Ed =- 5, as an
absolute value Ed is more than 1.
It is the case of a product that has many
substitutes & is not important to the consumer.
Demand curve is relatively flat( versus the
following fifth last case). The diagram is as
follows:
A relatively elastic demand curve

5-Ed is less than unity.
Demand is inelastic
Meaning: % change in Q is less than the %
change in P.
Example: When price rises by 10%, Quantity
demanded falls slightly by 2%. Thus the value of
Ed is - 0.5 ( less than one, as an absolute value).
Real case study: it might be a necessary product
to the consumer, & it had few substitutes. The
demand curve will be relatively steep versus the
previous case.
Demand curve that is relatively inelastic:

5- Relation between changes in price,
changes in revenues & Ed.
Definitely total revenue is just equal to total
spending ( P . Q)
If demand for the product is elastic( eg. When
price falls by 10%, quantity demanded increases
greatly , by 50% for instance, thus offsetting the
decrease in price & total revenue increases. Thus
if demand is elastic, seller should lower the price
to boost revenues.
This can be seen from the following
diagram:
If demand for the product is inelastic ( eg
when price rises by 20% , quantity
demanded falls slightly by 5% , for
instance, thus price change offsets
quantity change & total revenues increase.
Thus, if demand is inelastic it is for the
benefit of the seller to increase the price
to receive more of a revenue.
The following diagram shows the previous
case;
If demand for the product is of unit
elasticity( eg. A fall in price by 10% is
offset by an increase in quantity by 10%,
thus leaving revenues constant.) This can
be seen in the following diagram:
The diagram shows that the total revenue
( Or total spending from consumers side
is constant regardless of price changes.
5- What determines Ed?

Main determinants are:
The more important & necessary the product is ,
the less the elasticity .( demand is inelastic for
necessities & elastic for products that are not
important for the consumer).
The more the number of substitutes , the more
the elasticity( the demand is elastic for a product
with many substitutes & inelastic in case of few
substitutes).
The longer the time period , the more the
elasticity.
Cases to comment on:
1- TWA company was seeking to maximize
revenues. Top managers advised the company to
increase the prices of the VIP class & to decrease
the prices of the economy class on the same
flight.
2-Directly after the October War in 1973, many
Arab countries were able to maximize petroleum
revenues as the price per barrel increased by 4
fold. However, afterwards, the foreign importing
countries set strategies to confront the
unfavorable supply shock.
3- The prices of some goods seem to
fluctuate more than others as a result of a
decrease in supply, prove that the price
elasticity of demand is behind such price
fluctuations.
HINT : the less the elasticity the more the
price fluctuations.
Price Elasticity of Supply
1- What is Es?
2- How to measure Es?
3- different values of Es & shapes of
Supply curves.
4- what determines Es?
1-What is Es?
Es is a measure that shows how % change
in quantity supplied of the product
RESPONDS to the % change in the price
of the product, other factors being
constant.
2-How to measure Es?

Es= % change in Qs/ % change in price.
Es= change in Qs/change in P . P/Q
Eg. Calculate Es if you know that the
quantity supplied of a product increased
by 40% when its price increased by 10%.
Answer: Es = =40%/=10%=4( every 1%
change in price yields 4% changes in qs(
in the same direction)
Calculate Es from the following table
using point elasticity of supply
Assume that A) is the original situation:
P Qs
A) 10 100
B) 60 900
Es= 800/50.10/100= 1.6( more than 1,
thus supply is elastic)
3- Different values of Es & shapes of
Supply curves
1- Es= zero ( Supply is perfectly
inelastic)
Meaning: Qs is constant regardless of
price changes , eg. Crop with no
inventories in the very short run.
Supply curve is vertical as following:
Supply curve that is
perfectly inelastic:
2- Es= infinity( supply is perfectly
elastic)
Meaning EG. Suppliers supply all they can
at a certain price & none at a slightly
lower price.
Supply curve is horizontal as following:
3-Es=1 ( supply is of unit elasticity)
Meaning :% change in Qs=% change in P
Supply curve originates from the origin (
or its extension starts from the origin) as:
4- ES is more than 1( supply is elastic)
Meaning :% change in Qs exceeds %
change in P. The supply curve is relatively
flat versus the coming last case, it
intersects the horizontal axis) as:
5- Es is less than 1( supply is inelastic)
Meaning: % change in Qs is less than %
change in P. Supplier CANNOT respond
GREATLY to the price signals. Supply
curve is relatively steep versus the
previous case , it intersects the horizontal
axis as:
4- what determines Es?
1- The more
efficient &
sufficient the
resources are
the more the
elasticity.
2- The longer
the period of
time, elasticity
usually
increases