Micro topic 3: Slope and elasticity (2016)
Apunte InglésUniversidad  Universidad Pompeu Fabra (UPF) 
Grado  International Business Economics  1º curso 
Asignatura  Introduction to Microeconomics 
Año del apunte  2016 
Páginas  3 
Fecha de subida  11/11/2017 
Descargas  0 
Subido por  ccastellsfontelles 
Vista previa del texto
Topic 3
Introduction to microeconomics
Topic 3: Slope and Elasticity of demand and supply
The concept of elasticity
Elasticity: How much one variable responds to changes in with respect to a variation of another
variable. Numerical measure of the responsiveness of Qd or Qs to one of its determinants, where
Qd and Qs are short form for quantity demanded and quantity supplied.
In general, if the price rises:

The quantity demanded falls (slope<0)
The quantity supplied rises (slope>0)
Elasticity and demand
To determine the quantity of an increase or decrease in demand, we use a certain type of
elasticity: the priceelasticity of demand.
It measures the degree of variation of quantity demanded with respect to price fluctuation. This
means, elasticity tells us the percentage change in quantity demanded caused by a change in
the price of 1 percent (as we move along the demand curve).
*What determines demand price elasticity?
Price elasticity is higher when close substitutes are available. (Demand is more sensible).
Price elasticity is higher for narrowly defined markets. (A narrow defined market, as black
Tshirts, is much more sensible than a wider one, as clothes).
Price elasticity is higher for luxuries than for necessities. (If it is a necessity, demand will be
insensible).
Price elasticity is higher in the long run than in the short run, because in the long run, people
are able to change habits. If they were not able to do so, they would have to pay the expensive
price.
To calculate the price elasticity of demand:
If we consider (P,Q) and (P’,Q’) two points of the curve, from the previous equation we obtain
that:
Percentage change in price: 100𝑥
𝑃′ −𝑃
𝑃
Percentage change in quantity: 100𝑦
= 100𝑥
𝑄 ′ −𝑄
𝑄
𝛥𝑃
𝑃
= 100𝑥
𝛥𝑄
𝑄
1
Topic 3
Introduction to microeconomics
Computing the variations in a single formula and simplifying, we obtain:
𝑝 𝛥𝑞
𝐸𝑑 = 𝑞 𝛥𝑝
It can be seen that the second division is the formula of the inverted slope; we can obtain the
final formula:
𝑃 1
𝑄 𝑠𝑙𝑜𝑝𝑒
Depending on the result obtained, demand can be elastic if it’s smaller than 1, which is that the
quantity demanded decreases proportionally more than the percentage in which price increases;
or inelastic, if elasticity is between 0 and 1, which happens when the quantity demanded
increases proportionally less than the percentage at which price changes.
perfectly inelastic demand priceelasticity = 0 (The form is completely vertical) demand
doesn’t decrease at any proportion when price increases a concrete percentage.
perfectly elastic demand priceelasticity = ∞ (The form is completely horizontal) every
percentage change in the price would eliminate all the demand.
isoelastic demand priceelasticity = 1 demand decreases in the same proportion of the
percentage increase of price.
Elasticity and supply
To determine the quantity of an increase or decrease in supply, we use a certain type of
elasticity: the priceelasticity of supply.
It measures the degree of variation of quantity supplied with respect to price fluctuation. This
means, elasticity tells us the percentage change in quantity supplied caused by a change in the
price of 1 percent (as we move along the demand curve).
*What determines supply price elasticity?
It basically depends on the capacity sellers to alter that good’s production. Therefore,
manufactured goods, as televisions, comics or clothes have a more elastic supply because their
production can be modified relatively easily; chalets by the beach, however, have an inelastic
supply.
In a longterm, supply can be modified more easily and, therefore, supply is more elastic for
bigger temporal horizons.
The formula to calculate the Priceelasticity is the same as for the demand elasticity, so only data
has to be changed. Depending on the obtained result, demand will be elastic if it’s greater tan
one, inelastic if it’s smaller tan 1, isoelastic if it’s equal to 1, and perfectly inelastic if it’s 0 or
perfectly elastic if it’s infinite.
2
Topic 3
Introduction to microeconomics
Elasticity and total income
Thanks to Priceelasticity, we can calculate what is the total income if the price of a good
increases or decreases.
To do that, only demand elasticity must be taken into account. If the price of a good decreases
and the demand is elastic, the quantity demanded increases at a higher proportion than the
reduction of price, and total income increases. This means, price and total income are inverse
proportional if demand is elastic.
However, if the price of a good decreases and the demand is inelastic, the quantity demanded
increases in a minor proportion than the price reduction and the total income decreases. This
means, price and total income are directly proportional if demand is inelastic.
Slope
Slope: The change in quantity demanded (or supply) when price increases by one unit. (the
sensitivity of demand to price changes).
Calculation of the slopes
𝛥𝑃

With differences:
𝑆=

With derivatives:
𝑠=
𝛥𝑄
ⅆ𝑃
ⅆ𝑄
The slope depends on the units in which we measure price and quantity.
Economists usually measure the sensibility by estimating the percentage change of one variable
to another.
Relationship between slope and elasticity
The more horizontal the curve, the greater the change in quantity.
The more vertical the curve, the lesser the change in quantity.
DIFFERENCE BETWEEN SLOPE AND ELASTICITY
The elasticity changes along the curve, but the slope remains constant.
The slope measures the ratio of changes but the elasticity measures the ratio of percentage
changes.
(In the slope: you decrease 10 units.
In the demand: you decrease 10%)
3
...