How is the elasticity of supply similar to the elasticity of demand How is it different?

Q: How is elasticity of supply similar to elasticity of demand?

The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

Q: How are elastic and inelastic supply and demand similar and different?

Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.

Q: What is the difference between elasticity and elasticity of demand?

Elasticity occurs when demand responds to changes in price or other factors. Inelasticity of demand means that demand remains constant even with changes in economic factors.

Q: How are demand and supply similar?

The law of supply and demand combines two fundamental economic principles describing how changes in the price of a resource, commodity, or product affect its supply and demand. As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while demand grows.

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Learning Objectives

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Calculating Price Elasticity of Demand
Key Concepts and Summary
How is elasticity of supply similar to elasticity of demand?
How are elastic and inelastic supply and demand similar and different?
What is the difference between elasticity and elasticity of demand?
How are demand and supply similar?

Table $\PageIndex{1}$: Elastic, Inelastic, and Unitary - Three Cases of Elasticity

If . . .	Then . . .	And It Is Called . . .
	$\frac{\text{% change in quantity}}{\text{% change in price}} > 1$	Elastic
	$\frac{\text{% change in quantity}}{\text{% change in price}} = 1$	Unitary
	$\frac{\text{% change in quantity}}{\text{% change in price}} < 1$	Inelastic

Calculating Price Elasticity of Demand

Calculating the Price Elasticity of Demand

Figure $\PageIndex{1}$: The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price.

Example $\PageIndex{1}$: Finding the Price Elasticity of Demand

Figure $\PageIndex{2}$: The price elasticity of supply is calculated as the percentage change in quantity divided by the percentage change in price.

Is the elasticity the slope?

Key Concepts and Summary

Glossary

elastic demandwhen the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in priceelastic supplywhen the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in priceelasticityan economics concept that measures responsiveness of one variable to changes in another variableinelastic demandwhen the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes inelastic supplywhen the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)price elasticitythe relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied price elasticity of demandpercentage change in the quantity demanded of a good or service divided the percentage change in priceprice elasticity of supplypercentage change in the quantity supplied divided by the percentage change in priceunitary elasticitywhen the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied

Price Elasticity of Demand and Supply The slope of a line tells us its steepness; it is a relationship between price changes and quantity changes on
a demand curve, for example. It that case, it is always a negative relationship.

For a given price change, how responsive is the decline in quantity? For a given per centage change in P,
how large will be the per centage change in Q?

Price Elasticity of Demand: The percentage change in Quantity Demanded that results from a 1% change in Price.
In other words, the percentage change in Quantity Demanded caused by a percentage change in P.

There are two basic ways to measure elasticity. We can use a Point Elasticity measure, or an Arc Elasticity Measure:

Point Elasticity Measure:

|DQ/Q| = | P * DQ | = e
| DP/P | | Q DP |
Arc Elasticity Measure:

|     (Q2-Q1)/[Q1+Q2]    | = e
|                          2           |
|      (P2-P1)/[P1+P2]        |
                        2

Total Revenue: Dollars earned by suppliers
in the market per period by the sale of
quantity of a good at a given price.

TR = P x Q

Dollars per period = [$/unit] *[# of units sold]
per period

Suppose we have the following demand curve, P = 100-Q/2 with the accompanying graph.

There are three points marked on the graph:

Point A: P = 80, Q = 40 , Total Revenue = $3200

Point M: P = 50, Q = 100, Total Revenue = $5000

Point B: P = 20, Q = 160, Total Revenue = $3200

We can graph Total Revenue as an area on the graph of the demand curve, or, we
can graph Total Revenue against quantity per period directly, and get the following
graph. Note the 'upside-down bowl' shape of the TR curve. Note, too, that
TR reaches it maximum at the midpoint of the demand cureve, where the price
elasticity of demand equals 1.

Point Elasticity at Point M: P = 50, Q = 100:

At (100,50):

e = | 50/100 * -50 | = 1 At the midpoint, e = 1. This is a Unit Elastic point.
| 25 |

Point elasticity at Point A: P = 80,Q = 40:

e = | 80/40 * -2 | = 4 Curve is elastic at (40,80), since e>1.

Point elasticity at Point B: P = 20, Q =160:

e = | 20/160 * -2 | = 1/4 Curve is inelastic at (160,20), since e<1.

Using the Arc Elasticity Measure, or Mid-Point Formula:

Midpoint forumula: Calculate the elasticity on the arc
from Point A to Point M, starting at Point A:

Let (Q1,P1) = (40,80) = Point A

Let (Q2,P2) = (100,50) = Point M

Q2-Q1 = 100-40 = 60 (Q2+Q1)/2 = 140/2 = 70

P2-P1 = 50-80 = -30 (P2+P1)/2 = 130/2 = 65

e = [60/70]/[-30/65] = [130/70] = 1.86

NOTE: The arc elasticity equals the point elasticity at the midpoint
of the arc. That is why the arc elasticity formula is sometimes
called the midpoint formula.

For this problem, at the point P = 65, Q = 70, the point elasticity would
be:

e = | 65/70 * -2 | = [130/70] = 1.86

Price elasticity of demand measures the availability of
substitutes for a good.

1. A more elastic curve => there are more available
substitutes for the good.

2. The more narrowly defined is a good, the more
elastic is its demand. Demand for food, for example,
is less elastic than demand for a
type of food, hamburgers, for instance.

3. Over time, we expect elasticity to grow, as more
substitutes are made available.
Demand for gasoline today is less elastic than
demand for gasoline per month, or per year, others things equal.

See the accompanying graph.

Steeper demand curve: P = 100 - Q/2

At C, the point price elasticity of demand is

|40/120*-2| = 2/3

Flatter demand curve: P = 50 - Q/4

At câ, the point price elasticity of demand is

|20/120*-4| = 2/3

Yet, we would call the ãflatterä demand curve more
elastic than the ãsteeperä one.

Assume we have the supply curve: P = 10+Q/2

Equilibrium with P = 100-Q/2:

       100-Q/2 = 10+Q/2
                 90 = Q
                 55 = P      Call this point E.

Equilibrium with P = 50-Q/4

          50-Q/4 = 10+Q/2
                40 = 3Q/4
                53.3 = Q
               36.65 = P   Call this point F.

Point Elasticity at Point E:

P/Q = 55/90
DQ/DP = -2 Point elasticity = [55/90]*2 = 110/90

= 1.22

Point Elasticity at Point F:

P/Q = 36.65/53.3
DQ/DP = -4 Point elasticity = [36.65/53.3]*4
= 2.75

For a given supply curve, then, the equilibrium point on the steeper demand
curve is less elastic than the equilibrium point on the flatter demand curve.

Price Elasticity of Supply

Price elasticity of supply is very similar in concept to price elasticity of demand. In each case, we are measuring the responsiveness of a quantity to a change in price.

Price Elasticity of Supply: The percentage change in Quantity Supplied that results from a 1% change in Price.
In other words, the percentage change in Quantity Supplied caused by a percentage change in P.

The equation used to calcuate the price elasticity of supply is the same as that used for the price elasticity of demand:

Point Elasticity Measure:

|DQ/Q| = | P * DQ | = e
| DP/P | | Q DP |

Arc Elasticity Measure:

|     (Q2-Q1)/[Q1+Q2]    | = e
|                          2           |
|      (P2-P1)/[P1+P2]        |
                        2

A linear supply curve that has a positive intercept on the vertical or Price axis is elasticat every point: For every point on the curve, e>1 at every point, and e approaches 1 as Q rises from 0.

A linear supply curve that has a negative intercept on the vertical or Price axis, is inelastic at every point: For every point on the curve, e<1at every point, and e approaches 1 as Q rises from 0.

A linear supply curve that has an intercept of 0, i.e., goes through the origin, is unit elastic at every point: For every point on
the curve, e = 1.

How is elasticity of supply similar to elasticity of demand?

The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

How are elastic and inelastic supply and demand similar and different?

Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.

What is the difference between elasticity and elasticity of demand?

Elasticity occurs when demand responds to changes in price or other factors. Inelasticity of demand means that demand remains constant even with changes in economic factors.

How are demand and supply similar?

The law of supply and demand combines two fundamental economic principles describing how changes in the price of a resource, commodity, or product affect its supply and demand. As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while demand grows.