## Introduction to Elasticity

Read this chapter to learn about the concept of elasticity. Be sure to read all the sections in this chapter (Sections 5.1-5.4) following the introduction.

### 5.1 Price Elasticity of Demand and Price Elasticity of Supply

#### Calculating the Price Elasticity of Supply

Assume that an apartment rents for $650 per month and at that price 10,000 units are rented as shown in Figure 5.3. When the price increases to$700 per month, 13,000 units are supplied into the market. By what percentage does apartment supply increase? What is the price sensitivity?

Figure 5.3 Price Elasticity of Supply The price elasticity of supply is calculated as the percentage change in quantity divided by the percentage change in price.

Using the Midpoint Method,

\begin{aligned} \% \text { change in quantity } &=\frac{13,000-10,000}{(13,000+10,000) / 2} \times 100 \\ &=\frac{3,000}{11,500} \times 100 \\ &=26.1 \\ \% \text { change in price } &=\frac{\ 700- \ 650}{(\ 700+\ 650) / 2} \times 100 \\ &=\frac{50}{675} \times 100 \\ &=7.4 \\ \text { Price Elasticity of Supply } &=\frac{26.1 \%}{7.4 \%} \\ &=3.53 \end{aligned}

Again, as with the elasticity of demand, the elasticity of supply is not followed by any units. Elasticity is a ratio of one percentage change to another percentage change – nothing more – and is read as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. The greater than one elasticity of supply means that the percentage change in quantity supplied will be greater than a one percent price change. If you're starting to wonder if the concept of slope fits into this calculation, read the following Clear It Up box.