Tutorial: Elasticity
1. Reviewing the Basics
Remember, the formula for Point Price Elasticity of Demand (or Supply) is:
The formula for the Mid-point Price Elasticity of Demand (or Supply) is:
a) In your own words, what is:
i) Price elasticity
ii) Unit elasticity
iii) Inelastic demand
b) Consider the following questions:
i) What factors can cause the elasticity of demand to change?
ii) What does the value of the elasticity represent?
iii) If revenue increases with higher prices, is the good considered to be elastic or inelastic?
iv) Why does the elasticity of demand for a good decline as we move down along a straight-
line demand curve? (Hint: look at formula above)
c) Draw a demand and supply graph (with labelled axes) with two demand and supply curves
with different slopes. Which of the demand and supply curves are more elastic?
2. The Application
a) At a price of $4.50 per cappuccino, a coffee shop expects to sell 120 cappuccinos per day. At
a price of $5.50, quantity demanded of cappuccinos falls to 80.
i) What is the price elasticity of demand for cappuccinos using the mid-point formula?
ii) What does your answer tell you about consumers’ coffee-drinking habits?
iii) Over time, do you expect the price elasticity for cappuccinos to increase, decrease or
stay the same?
b) The schedule below shows the number of croissants customers purchase from all bakeries
across a city each day at various prices.
Price ($/croissant) Number of croissants purchased per day
6 0
5 3,000
4 6,000
3 9,000
2 12,000
1 15,000
0 18,000
i) Graph the daily demand curve for croissants in the city.
ii) Calculate the price elasticity of demand for croissants, when the price is $3 per
croissant, using the point elasticity of demand formula. Is demand elastic or inelastic?
iii) If the price rises from $3 per croissant to $4 per croissant, what does economic theory
tell you will happen to revenue based on the demand elasticity?
iv) Calculate the revenues at $3 per croissant and $4 per croissant to verify if your answer
in iii) is correct.
v) If you were incorrect in iii), can you think of why?
c) Consider two markets:
Market 1: Dell products (consists of electronic hardware).
Market 2: Electronic hardware (all companies).
Which market’s demand is more elastic? Why?
3. The Creative
DURING or AFTER the tutorial, work through the following to develop your understanding of
how your shopping behaviour is determined by your demand elasticity.
a) Reflect on your own personal situation (examples in brackets):
Think of an item/event/activity you have bought this week (pizza, fuel, music festival tickets)
i) Is it an essential or luxury product?
ii) Is the elasticity of demand for this product generally elastic or inelastic?
iii) Which of the factors affecting elasticity of demand will greatly affect this product?
(Substitutes, Time, Essential v Luxury, % of consumer budget)