Chapter

5
Elasticity and
Its
Application
TENTH EDITION
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. 1
 IN THIS CHAPTER
• What is elasticity?
• What kinds of issues can elasticity help us
understand?
• What is the price elasticity of demand?
How is it related to the demand curve?
How is it related to revenue and expenditure?
• What are the income and cross-price elasticities
of demand?
• What is the price elasticity of supply?
How is it related to the supply curve?

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
 The Elasticity of Demand
• Elasticity
– Measure of how much buyers and seller respond
to changes in market conditions
– Measure of the responsiveness of Qd or Qs to a
change in one of its determinants
• Price elasticity of demand
– How much the quantity demanded of a good
responds to a change in its price
– Loosely speaking, it measures the price-
sensitivity of buyers’ demand

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
 The Price Elasticity of Demand
Price elasticity of demand is
𝑑
P
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄
P rises P2
¿
by 10% P1 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐h𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
D Along a D curve, P
and Q Q move in
opposite Q2 Q1
directions, which would
Q falls
by 15%
make price elasticity
negative.
We will drop the minus sign and report all price
elasticities as positive numbers (absolute values).
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4
 Calculating Percentage Changes
Demand for maintaining Standard method of
social media accounts computing the percentage (%)
P change in a variable:
B
$2500
A = ×100
$2000
D Going from A to B:
• the % change in P = 25%
Q
8 12 • the % change in Q = - 33%
Going from B to A: Price elasticity = 33/25 = 1.33
• % change in P = - 20%
We get different values!
• % change in Q = 50%
Price elasticity =50/20 = 2.5
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5
 The Price Elasticity of Demand
• Midpoint method
– The midpoint is the number halfway between the start and
end values
• The average of those values

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 6
website, in whole or in part.
 Our Scenario: Calculating Percentage Changes
Demand for maintaining
social media accounts Using the midpoint method
of computing percentage
P
B changes:
$2500
A
$2000
40 %
D Price elasticity = =1.8
22.2 %
Q
8 12

$2,500−$2,000
% change in P = ×100=22.2%
$2,250
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7
Active Learning 1: Calculate an elasticity
Use the following information to calculate the
price elasticity of demand for iPhones:
• if P = $400, Qd = 10,600
• if P = $600, Qd = 8,400
A. Use the midpoint method to calculate percentage change
in price
B. Use the midpoint method to calculate percentage change
in quantity
C. Calculate the price elasticity of demand

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8
Active Learning 1: Answers
Using the midpoint method to calculate
percentage changes:
A. % change in P =
[($600 - $400)/$500] ×100 = 40%
B. % change in Qd =
[(8,400 – 10,600)/9,500] ×100 = - 23.16%
C. Price elasticity of demand =
= % change in Qd / % change in P
= 23.16 / 40 = 0.58 (ignoring the minus sign)

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9
 Determinants of Price Elasticity of Demand
We look at a series of examples comparing two common
goods.
• In each example:
– Suppose prices of both goods rise by 20%
– Which good has the highest price elasticity of demand?
Why?
– What lesson we learn about the determinants of price
elasticity of demand?

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10
EXAMPLE 1: Cheerios vs. Airfare
Prices of both of these goods rise by 20%.
For which good does Qd drop the most?
Why?
• Cheerios has many close substitutes, so
buyers can easily switch if the price rises
• Traveling by airplanes has no close
substitutes, so a price increase would not
affect demand very much
Price elasticity is higher when close substitutes
are available.
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11
EXAMPLE 2: Mountain Dew vs. Soda (pop)
Prices of both of these goods rise by 20%.
For which good does Qd drop the most? Why?

• For a narrowly defined good, Mountain Dew,

there are many substitutes
• There are fewer substitutes available for
broadly defined goods (soda / pop)
Price elasticity is higher for narrowly defined
goods than for broadly defined ones.

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12
EXAMPLE 3: Insulin vs. Rolex watches
Prices of both of these goods rise by 20%.
For which good does Qd drop the most?
Why?
• Insulin is a necessity to diabetics. A rise in
price would cause little or no decrease in
quantity demanded
• A Rolex watch is a luxury. If the price rises,
some people will forego it.
Price elasticity is higher for luxuries than for
necessities.
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13
EXAMPLE 4: Gasoline, Short Run vs. Long Run
The price of gasoline rises 20%. Does Qd drop more in the
short run or the long run? Why?

• There’s not much people can do in the

short run, other than ride the bus or carpool.

• In the long run, people can buy smaller cars

or live closer to work.
Price elasticity is higher in the long run.

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14
 The Variety of Demand Curves – 1
• Demand is elastic
– Price elasticity of demand > 1
• Demand is inelastic
– Price elasticity of demand < 1
• Demand has unit elasticity
– Price elasticity of demand = 1

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 15
website, in whole or in part.
 The Variety of Demand Curves – 2
• Demand is perfectly inelastic
– Price elasticity of demand = 0
– Demand curve is vertical
• Demand is perfectly elastic
– Price elasticity of demand = infinity
– Demand curve is horizontal
• The flatter the demand curve
– The greater the price elasticity of demand

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 16
website, in whole or in part.
 Perfectly Inelastic Demand
Price elasticity % change in Q 0%
= = =0
of demand % change in P 10%

P
D
• D curve:
Vertical
P1
• Consumers’
P2 price sensitivity:
None
P falls
by 10% Q1 Q • Elasticity:
Q changes 0
by 0%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17
 Inelastic Demand
Price elasticity % change in Q <10%
= = <1
% change in P 10%
of demand
P
• D curve
P1 relatively steep
• Consumers’ price
P2
D
sensitivity:
P falls relatively low
by 10% Q1 Q2 Q • Elasticity:
Q rises less <1
than 10%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18
 Unit Elastic Demand
Price elasticity % change in Q 10%
= = =1
% change in P 10%
of demand
P
• D curve
intermediate
P1 slope
P2 • Consumers’ price
D
sensitivity:
P falls intermediate
by 10% Q1 Q2 Q
• Elasticity:
Q rises
by 10% =1
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19
 Elastic Demand
Price elasticity % change in Q >10%
= = >1
% change in P 10%
of demand
P • D curve
relatively flat
P1
• Consumers’ price
P2 D sensitivity:
relatively high
P falls
by 10% Q1 Q2 Q • Elasticity:
Q rises more >1
than 10%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20
 Perfectly Elastic Demand
Price elasticity % change in Q any %
= = = infinity
% change in P 0%
of demand
P • D curve
D horizontal
P2 = P1
• Consumers’
P changes
by 0% price sensitivity:
extreme
Q1 Q2 Q • Elasticity:
Q changes infinity
by any %
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21
 A Few Elasticities from the Real World

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22
 Elasticity Along a Linear Demand Curve

The slope of a
P
200% linear demand
$30 E = = 5.0 curve is constant,
40%
but its elasticity
67%
20 E = = 1.0 is not.
67%
40%
10 E = = 0.2
200%

$0 Q
0 20 40 60

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23
 Our Scenario: Total Revenue
Continuing our scenario, if you raise your price
from $2,000 to $2,500, would your revenue rise
or fall?
Total Revenue (TR) = P x Q
• A price increase has two effects on revenue:
– Higher revenue: because of the higher P
– Lower revenue: you maintain fewer accounts
(lower Q)
• Which of these two effects is bigger?
– It depends on the price elasticity of demand
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24
 Our Scenario: Elastic Demand (E = 1.8)
Demand for maintaining Price elasticity of
social media accounts demand = 1.8
increased revenue • If P = $2,000,
due to higher P Q = 12, then TR =
P
lost revenue $24,000
due to lower Q • If P = $2,500,
$2500
Q = 8, then TR =
$2000 $20,000
D
When D is elastic,
a price increase
causes revenue to fall.
Q
8 12
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25
 Our Scenario: Inelastic Demand (E = 0.82)
Demand for maintaining Price elasticity of
social media accounts demand = 0.82
increased revenue • If P = $2,000,
due to higher P
P Q = 12, then TR =
lost revenue $24,000
due to lower Q
• If P = $2,500,
$2500
Q = 10, then TR=
$2000 $25,000
D When D is inelastic,
a price increase causes
revenue to rise.
Q
10 12
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26
 Price Elasticity and Total Revenue
• For a price increase, if demand is elastic
 TR decreases: the fall in Q is proportionately
greater than the rise in P.
 The extra revenue from selling units at a higher price
is smaller than the decline in revenue from selling
fewer units
 For a price increase, if demand is inelastic
 TR increases: the fall in Q is proportionately
smaller than the rise in P.
 The extra revenue from selling units at a higher price
more than offsets the decline in revenue from selling
fewer units
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 27
website, in whole or in part.
Active Learning 2: Elasticity and total revenue
A. Pharmacies raise the price of insulin by 10%.
– Does total expenditure on insulin rise or fall?
B. As a result of a fare war, the price of a luxury cruise falls
20%.
– Does luxury cruise companies’ total revenue rise or fall?

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28
Active Learning 2: Answers, A
A. Pharmacies raise the price of insulin by 10%.
– Does total expenditure on insulin rise or fall?

• Expenditure = total revenue = P x Q

• Insulin is a necessity
• Since demand for insulin is inelastic, Q will fall less than
10%, so expenditure rises.

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29
Active Learning 2: Answers, B
B. As a result of a fare war, the price of a luxury cruise falls
20%.
– Does luxury cruise companies’ total revenue rise or fall?

• Revenue = P x Q
• The fall in P reduces revenue, but Q increases,
which increases revenue. Which effect is
bigger?
• Since demand is elastic, Q will increase more
than 20%, so revenue rises.
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30
 Does Drug Interdiction Increase or Decrease
Drug-related Crime?
1. Policy: Drug Interdiction
Increase the number of federal agents
devoted to the war on drugs
– Illegal drugs: supply curve shifts left
• Higher price and lower quantity
– Amount of drug-related crimes
• Inelastic demand for drugs
• Higher drugs price: higher total revenue
• Increase drug-related crime

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 31
website, in whole or in part.
 Policy 1: Drug Interdiction
Interdiction reduces Price of
the supply of drugs. Drugs new value of drug-
• Demand for related crime
D1 S2
drugs is inelastic: S1
P rises P2
proportionally
more than Q falls. P initial value
1
Result: an increase of drug-
related
in total spending on crime
drugs, and in drug-
related crime. Q2 Q1 Quantity
of Drugs
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32
 Does Drug Interdiction Increase or Decrease
Drug-related Crime?
2. Policy: Drug Education
– Reduce demand for illegal drugs
– Left shift of demand curve
– Lower quantity
– Lower price
– Reduce drug-related crime

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 33
website, in whole or in part.
 Policy 2: Drug Education
Price of new value of drug-
Drugs related crime
Education reduces D2 D1
the demand for S
drugs.
• P and Q fall. P1 initial value
of drug-
Result: P2 related
A decrease in total crime
spending on drugs,
and in drug-related Q2 Q1 Quantity
crime. of Drugs

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34
 Income Elasticity of Demand
• Income elasticity of demand
– How much the quantity demanded of a
good responds to a change in consumers’
income
• Percentage change in quantity demanded
divided by the percentage change in income
– Normal goods: income elasticity > 0
– Inferior goods: income elasticity < 0

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 35
website, in whole or in part.
 Cross-Price Elasticity of Demand
• Cross-price elasticity of demand
– How much the Qd of one good responds to a change in
the price of another good
• Percentage change in Qd of the first good divided by the
percentage change in price of the second good
– Substitutes: cross-price elasticity > 0
– Complements: cross-price elasticity < 0

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 36
website, in whole or in part.
 The Price Elasticity of Supply
• Price elasticity of supply
– How much the quantity supplied of a good responds to a change
in its price
• Percentage change in quantity supplied divided by the
percentage change in price
– Loosely speaking, it measures sellers’
price-sensitivity
• Elastic supply: the quantity supplied responds substantially to
price changes
• Inelastic supply: if the quantity supplied responds only slightly

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 37
website, in whole or in part.
 Calculating Price Elasticity of Supply
𝑠
percentage change in Q 16 %
𝑃𝑟𝑖𝑐𝑒𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑠𝑢𝑝𝑝𝑙𝑦= = =2
percentage change in P 8%
P
S

P rises P2
Again, we use the by 8% P
1
midpoint method to
compute the
percentage Q
Q1 Q2
changes.
Q rises
by 16%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38
EXAMPLE 5: Price elasticity of supply
The price of pizza increased from $12 to $14 per
pie, and increased the quantity produces in your
town from 150 to 170 pies per day.

P S Price elasticity of supply =

$14
$12

150 170 Q

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39
 The Variety of Supply Curves – 1
• Supply is unit elastic
– Price elasticity of supply = 1
• Supply is elastic
– Price elasticity of supply > 1
• Supply is inelastic
– Price elasticity of supply < 1

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 40
website, in whole or in part.
 The Variety of Supply Curves – 2
• Supply is perfectly inelastic
– Price elasticity of supply = 0
– Supply curve is vertical
• Supply is perfectly elastic
– Price elasticity of supply = infinity
– Supply curve is horizontal
• The flatter the supply curve
– The greater the price elasticity of supply

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 41
website, in whole or in part.
 Perfectly Inelastic Supply
Price elasticity % change in Q 0%
= = =0
% change in P 10%
of supply
• S curve: P
S
vertical
• Sellers’ price P
P rises 2
sensitivity: by 10% P
1

none
• Elasticity: Q
Q1
0 Q changes
by 0%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42
 Inelastic Supply
Price elasticity % change in Q < 10%
= = <1
% change in P 10%
of supply
• S curve: P
S
relatively steep
• Sellers’ price P rises
P2
sensitivity: by 10% P1
relatively low
• Elasticity: Q
Q1 Q2
<1 Q rises less
than 10%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43
 Unit Elastic Supply
Price elasticity % change in Q 10%
= = =1
% change in P 10%
of supply
• S curve:
P
intermediate slope S
• Sellers’ price P2
sensitivity: P1
intermediate P rises
• Elasticity: by 10% Q
Q1 Q2
=1
Q rises
by 10%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44
 Elastic Supply
Price elasticity % change in Q > 10%
= = >1
% change in P 10%
of supply
• S curve:
P
relatively flat S
• Sellers’ price P rises P2
sensitivity: by 10%
P1
relatively high
• Elasticity: Q
Q1 Q2
>1 Q rises more
than 10%
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45
 Perfectly Elastic Supply
Price elasticity % change in Q any %
= = = infinity
% change in P 0%
of supply
• S curve:
P
horizontal
• Sellers’ price P2 = P1 S
sensitivity: P changes
extreme by 0%
• Elasticity: Q
Q1 Q2
infinity Q changes
by any %
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46
 The Determinants of Supply Elasticity
• The more easily sellers can change the
quantity they produce, the greater the price
elasticity of supply.
– Example: Supply of beachfront property is
harder to vary and thus less elastic than
supply of new cars.

47
 The Determinants of Supply Elasticity

• For many goods, price elasticity of supply

is greater in the long run than in the short run,
because firms can build new factories,
or new firms may be able to enter the market.

48
Active Learning 3: Elasticity and changes in equilibrium
Assume the supply of parking spots is inelastic
and the supply of wheat is elastic. Suppose
population growth causes demand for both
goods to double (at each price, Qd doubles).
• For which product will P change the most?
• For which product will Q change the most?
A. Draw a graph with the new equilibrium in the
market for parking
B. Draw a graph with the new equilibrium in the
market for wheat

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49
Active Learning 3A: Parking spots
Parking spots
When supply is (inelastic supply):
inelastic, an P S

increase in D1 D2
demand has a
P2 B
bigger impact on
price than on
P1 A
quantity.
Q
Q1 Q2

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50
Active Learning 3B: Wheat

Wheat
When supply
P (elastic supply):
is elastic,
an increase in D1 D2
demand has a
bigger impact on B S
quantity than on P2
A
P1
price.
Q
Q1 Q2

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51
 How the Price Elasticity of Supply can Vary

Price Supply
Elasticity is small
$15 (less than 1).
12

Elasticity is large
(greater than 1).
4
3

0 100 200 500 525 Quantity

• Supply often becomes less elastic as Q rises, due

to capacity limits.
Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52
 More Applications – 1
1. Can Good News for Farming Be Bad News for
Farmers?
– New hybrid of wheat: 20% increased production per acre
• Supply curve shifts to the right
• Higher quantity and lower price
• Demand is inelastic: total revenue falls
– Paradox of public policy: induce farmers not to plant crops

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 53
website, in whole or in part.
 A Supply Increase in the Market for Wheat

1. When demand is inelastic,

Price of an increase in supply . . .
Wheat
S1

S2
2. … leads
$3
to a large 3. … and a proportionately
fall in 2 smaller increase in quantity
price. . . sold. As a result, revenue
falls from $300 to $220.
Demand
0 100 110 Quantity of Wheat

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54
 More Applications – 2
2. Why Has OPEC Failed to Keep the Price of Oil High?
– Increase in prices 1973-1974, 1979-1981
– Short-run: supply and demand are inelastic
• Decrease in supply: large increase in price
– Long-run: supply and demand are elastic
• Decrease in supply: small increase in price

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 55
website, in whole or in part.
 A Reduction in Supply in the World Market for Oil
(a) The Oil Market in the Short Run (b) The Oil Market in the Long Run
1. In the short run, when supply and 1. In the long run, when
demand are inelastic, a shift in supply and demand are
supply. . . elastic, a shift in supply. . .
Price
Price
S2 2. … leads to a
S1 S2
small increase S1
P2 in price

P2
P1 P1

2. … leads to a
large increase in Demand
price Demand
0 Quantity 0 Quantity

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56