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Video 1 - Price Elasticity of Demand - The Basics

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Video 1 - Price Elasticity of Demand - The Basics

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This video gives a brief description of price elasticity of demand and it gives some examples and some useful graphs. In this video the presenter uses the example of gasoline. Gasoline follows an inelastic demand curve because the demand of gasoline does not really change when its price does.

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Video 2 - Price Elasticity of Supply - The Basics

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Video 2 - Price Elasticity of Supply - The Basics

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This video goes through price elasticity of supply. It follows the same concept as price elasticity of demand but showcases the change in supply of a product in response to a change in its price.

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Video 3 - Price Elasticity - Real Example

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Video 3 - Price Elasticity - Real Example

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This is a very good video that displays a real world example with real world prices. This video will go through crude oil prices and what happens to supply and demand when the price of crude oil changes.

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Supply, Demand, and Price Elasticity | oil and gas

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A video about price elasticity calculations. The calculation for determining the price elasticity of demand is % ChangeInQuantityDemanded / % ChangeInPrice and for supply its % ChangeInQuantitySupplied / ChangeInPrice.

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How to Solve Elasticity Problems in Economics

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This article from Harvard Business is pretty much a summary of the previous videos in a more detailed format. In this article they link this concept to business owners and how they monitor the elasticity of a product. When they see high elasticity in a product they know that the product is now considered a commodity among customers. Most business owners want to go from elastic to inelastic because it shows that the product is valued no matter the price.

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Setting the right price for your product or service is hard. In fact, determining price is one of the toughest things a marketer has to do, in large part because it has such a big impact on the company's bottom line. One of the critical elements of pricing is understanding what economists call price elasticity.

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You can't form a pricing strategy without it.

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Price Elasticity - In-depth Graphs and Calculations

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Price Elasticity - In-depth Graphs and Calculations

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This article goes through more graphs and calculations. It will help develop a better understanding of price elasticity in the real world that business owners and economists use.

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Learning Objectives

By the end of this section, you will be able to:

Calculate the price elasticity of demand

Calculate the price elasticity of supply

Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. 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.

Elasticities can be usefully divided into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as summarized in Table 1.

If . . .

Then . . .

And It Is Called . . .

[latex]\%\;change\;in\;quantity > \%\;change\;in\;price[/latex]

[latex]\frac{\%\;change\;in\;quantity}{\%\;change\;in\;price)} > 1[/latex]

Elastic

[latex]\%\;change\;in\;quantity = \%\;change\;in\;price[/latex]

[latex]\frac{\%\;change\;in\;quantity}{\%\;change\;in\;price)} = 1[/latex]

Unitary

[latex]\%\;change\;in\;quantity < \%\;change\;in\;price[/latex]

[latex]\frac{\%\;change\;in\;quantity}{\%\;change\;in\;price)} < 1[/latex]

Inelastic

Table 1. Elastic, Inelastic, and Unitary: Three Cases of Elasticity

Before we get into the nitty gritty of elasticity, enjoy this article on elasticity and ticket prices at the Super Bowl.

To calculate elasticity, instead of using simple percentage changes in quantity and price, economists use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity, and is represented in the following equations:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { Q }_{ 2 }-{ Q }_{ 1 } }{ ({ Q }_{ 2 }+{ Q }_{ 1 })/2 } \times 100 \\[1em] \%\;change\;in\;price & \frac { { P }_{ 2 }-{ P }_{ 1 } }{ ({ P }_{ 2 }+{ P }_{ 1 })/2 } \times 100 \end{array}[/latex]

The advantage of the is Midpoint Method is that one obtains the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base for both cases.

Let's calculate the elasticity between points A and B and between points G and H shown in Figure 1.

First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point A:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 3,000 }-{ 2,800 } }{ ({ 3,000 }+{ 2,800 })/2 } \times 100 \\[1em] & \frac { 200 }{ 2,900 } \times 100 \\[1em] & = 6.9 \\[1em] \%\;change\;in\;price & \frac { { 60 }-{ 70 } }{ ({ 60 }+{ 70 })/2 } \times 100 \\[1em] & \frac { -10 }{ 65 } \times 100 \\[1em] & -15.4 \\[1em] Price\;Elasticity\;of\;Demand & \frac { 6.9\% }{ -15.4\% } \\[1em] & 0.45 \end{array}[/latex]

Therefore, the elasticity of demand between these two points is [latex]\frac { 6.9\% }{ -15.4\% }[/latex] which is 0.45, an amount smaller than one, showing that the demand is inelastic in this interval. Price elasticities of demand are always negative since price and quantity demanded always move in opposite directions (on the demand curve). By convention, we always talk about elasticities as positive numbers. So mathematically, we take the absolute value of the result. We will ignore this detail from now on, while remembering to interpret elasticities as positive numbers.

This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded. Price elasticities of demand are negative numbers indicating that the demand curve is downward sloping, but are read as absolute values. The following Work It Out feature will walk you through calculating the price elasticity of demand.

Finding the Price Elasticity of Demand

Calculate the price elasticity of demand using the data in Figure 1 for an increase in price from G to H. Has the elasticity increased or decreased?

Step 1. We know that:

[latex]Price\;Elasticity\;of\;Demand = \frac { \%\;change\;in\;quantity }{ \%\;change\;in\;price }[/latex]

Step 2. From the Midpoint Formula we know that:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { Q }_{ 2 }-{ Q }_{ 1 } }{ ({ Q }_{ 2 }+{ Q }_{ 1 })/2 } \times 100 \\[1em] \%\;change\;in\;price & \frac { { P }_{ 2 }-{ P }_{ 1 } }{ ({ P }_{ 2 }+{ P }_{ 1 })/2 } \times 100 \end{array}[/latex]

Step 3. So we can use the values provided in the figure in each equation:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 1,600 }-{ 1,800 } }{ ({ 1,600 }+{ 1,800 })/2 } \times 100 \\[1em] & \frac { -200 }{ 1,700 } \times 100 \\[1em] & -11.76 \\[1em] \%\;change\;in\;price & \frac { { 130 }-{ 120 } }{ ({ 130 }+{ 120 })/2 } \times 100 \\[1em] & \frac { 10 }{ 125 } \times 100 \\[1em] & 8.0 \end{array}[/latex]

Step 4. Then, those values can be used to determine the price elasticity of demand:

[latex]\begin{array}{r @{{}={}} l}Price\;Elasticity\;of\;Demand & \frac { \%\;change\;in\;quantity }{ \%\;change\;in\;price } \\[1em] & \frac { -11.76 }{ 8 } \\[1em] & 1.47 \end{array}[/latex]

Therefore, the elasticity of demand from G to H 1.47. The magnitude of the elasticity has increased (in absolute value) as we moved up along the demand curve from points A to B. Recall that the elasticity between these two points was 0.45. Demand was inelastic between points A and B and elastic between points G and H. This shows us that price elasticity of demand changes at different points along a straight-line demand curve.

Assume that an apartment rents for $650 per month and at that price 10,000 units are rented as shown in Figure 2. 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?

Using the Midpoint Method,

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 13,000 }-{ 10,000 } }{ ({ 13,000 }+{ 10,000 })/2 } \times 100 \\[1em] & \frac { 3,000 }{ 11,500 } \times 100 \\[1em] & 26.1 \\[1em] \%\;change\;in\;price & \frac { { \$700 }-{ \$650 } }{ ({ \$700 }+{ \$650 })/2 } \times 100 \\[1em] & \frac { 50 }{ 675 } \times 100 \\[1em] & 7.4 \\[1em] Price\;Elasticity\;of\;Demand & \frac { 26.1\% }{ 7.4\% } \\[1em] & 3.53 \end{array}[/latex]

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.

Is the elasticity the slope?

It is a common mistake to confuse the slope of either the supply or demand curve with its elasticity. The slope is the rate of change in units along the curve, or the rise/run (change in y over the change in x). For example, in Figure 1, each point shown on the demand curve, price drops by $10 and the number of units demanded increases by 200. So the slope is -10/200 along the entire demand curve and does not change. The price elasticity, however, changes along the curve. Elasticity between points A and B was 0.45 and increased to 1.47 between points G and H. Elasticity is the percentage change, which is a different calculation from the slope and has a different meaning.

When we are at the upper end of a demand curve, where price is high and the quantity demanded is low, a small change in the quantity demanded, even in, say, one unit, is pretty big in percentage terms. A change in price of, say, a dollar, is going to be much less important in percentage terms than it would have been at the bottom of the demand curve. Likewise, at the bottom of the demand curve, that one unit change when the quantity demanded is high will be small as a percentage.

So, at one end of the demand curve, where we have a large percentage change in quantity demanded over a small percentage change in price, the elasticity value would be high, or demand would be relatively elastic. Even with the same change in the price and the same change in the quantity demanded, at the other end of the demand curve the quantity is much higher, and the price is much lower, so the percentage change in quantity demanded is smaller and the percentage change in price is much higher. That means at the bottom of the curve we'd have a small numerator over a large denominator, so the elasticity measure would be much lower, or inelastic.

As we move along the demand curve, the values for quantity and price go up or down, depending on which way we are moving, so the percentages for, say, a $1 difference in price or a one unit difference in quantity, will change as well, which means the ratios of those percentages will change.

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded (or supplied) divided by the percentage change in price. Elasticity can be described as elastic (or very responsive), unit elastic, or inelastic (not very responsive). 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. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.

Self-Check Questions

1. From the data shown in Table 2 about demand for smart phones, calculate the price elasticity of demand from: point B to point C, point D to point E, and point G to point H. Classify the elasticity at each point as elastic, inelastic, or unit elastic.

2. From the data shown in Table 3 about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K, point L to point M, and point N to point P. Classify the elasticity at each point as elastic, inelastic, or unit elastic.

Point

Price

Quantity Supplied
Table 3.

Review Questions

1. What is the formula for calculating elasticity?

2. What is the price elasticity of demand? Can you explain it in your own words?

3. What is the price elasticity of supply? Can you explain it in your own words?

Critical Thinking Questions

1. Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case?

2. What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens to the measured elasticity? How would you explain that?

Problems

1. The equation for a demand curve is P = 48 - 3Q. What is the elasticity in moving from a quantity of 5 to a quantity of 6?

2. The equation for a demand curve is P = 2/Q. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these answers to be the same?

3. The equation for a supply curve is 4P = Q. What is the elasticity of supply as price rises from 3 to 4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers to be the same?

4. The equation for a supply curve is P = 3Q - 8. What is the elasticity in moving from a price of 4 to a price of 7?

Glossary

elastic demand

when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

elastic supply

when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

elasticity

an economics concept that measures responsiveness of one variable to changes in another variable

inelastic demand

when 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 supply

when 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 elasticity

the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied

price elasticity of demand

percentage change in the quantity demanded of a good or service divided the percentage change in price

price elasticity of supply

percentage change in the quantity supplied divided by the percentage change in price

unitary elasticity

when 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

Solutions
Answers to Self-Check Questions

1. From point B to point C, price rises from $70 to $80, and Qd decreases from 2,800 to 2,600. So:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 2,600 }-{ 2,800 } }{ ({ 2,600 }+{ 2,800 })/2 } \times 100 \\[1em] & \frac { -200 }{ 2,700 } \times 100 \\[1em] & -7.41 \\[1em] \%\;change\;in\;price & \frac { { 80 }-{ 70 } }{ ({ 80 }+{ 70 })/2 } \times 100 \\[1em] & \frac { 10 }{ 75 } \times 100 \\[1em] & 13.33 \\[1em] Elasticity\;of\;Demand & \frac { -7.41\% }{ 13.33\% } \\[1em] & 0.56 \end{array}[/latex]

The demand curve is inelastic in this area; that is, its elasticity value is less than one.

Answer from Point D to point E:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 2,200 }-{ 2,400 } }{ ({ 2,200 }+{ 2,400 })/2 } \times 100 \\[1em] & \frac { -200 }{ 2,300 } \times 100 \\[1em] & -8.7 \\[1em] \%\;change\;in\;price & \frac { { 100 }-{ 90 } }{ ({ 100 }+{ 90 })/2 } \times 100 \\[1em] & \frac { 10 }{ 95 } \times 100 \\[1em] & 10.53 \\[1em] Elasticity\;of\;Demand & \frac { -8.7\% }{ 10.53\% } \\[1em] & 0.83 \end{array}[/latex]

The demand curve is inelastic in this area; that is, its elasticity value is less than one.

Answer from Point G to point H:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 1,600 }-{ 1,800 } }{ ({ 1,600 }+{ 1,800 })/2 } \times 100 \\[1em] & \frac { -200 }{ 1,700 } \times 100 \\[1em] & -11.76 \\[1em] \%\;change\;in\;price & \frac { { 130 }-{ 120 } }{ ({ 130 }+{ 120 })/2 } \times 100 \\[1em] & \frac { 10 }{ 125 } \times 100 \\[1em] & 7.81 \\[1em] Elasticity\;of\;Demand & \frac { -11.76\% }{ 7.81\% } \\[1em] & -1.51 \end{array}[/latex]

The demand curve is elastic in this interval.

2. From point J to point K, price rises from $8 to $9, and quantity rises from 50 to 70. So:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 70 }-{ 50 } }{ ({ 70 }+{ 50 })/2 } \times 100 \\[1em] & \frac { 20 }{ 60 } \times 100 \\[1em] & 33.33 \\[1em] \%\;change\;in\;price & \frac { { \$9 }-{ \$8 } }{ ({ \$9 }+{ \$8 })/2 } \times 100 \\[1em] & \frac { 1 }{ 8.5 } \times 100 \\[1em] & 11.76 \\[1em] Elasticity\;of\;Supply & \frac { 33.33\% }{ 11.76\% } \\[1em] & 2.83 \end{array}[/latex]

The supply curve is elastic in this area; that is, its elasticity value is greater than one.

From point L to point M, the price rises from $10 to $11, while the Qs rises from 80 to 88:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 88 }-{ 80 } }{ ({ 88 }+{ 80 })/2 } \times 100 \\[1em] & \frac { 8 }{ 84 } \times 100 \\[1em] & 9.52 \\[1em] \%\;change\;in\;price & \frac { { \$11 }-{ \$10 } }{ ({ \$11 }+{ \$10 })/2 } \times 100 \\[1em] & \frac { 1 }{ 10.5 } \times 100 \\[1em] & 9.52 \\[1em] Elasticity\;of\;Demand & \frac { 9.52\% }{ 9.52\% } \\[1em] & 1.0 \end{array}[/latex]

The supply curve has unitary elasticity in this area.

From point N to point P, the price rises from $12 to $13, and Qs rises from 95 to 100:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 100 }-{ 95 } }{ ({ 100 }+{ 95 })/2 } \times 100 \\[1em] & \frac { 5 }{ 97.5 } \times 100 \\[1em] & 5.13 \\[1em] \%\;change\;in\;price & \frac { { \$13 }-{ \$12 } }{ ({ \$13 }+{ \$12 })/2 } \times 100 \\[1em] & \frac { 1 }{ 12.5 } \times 100 \\[1em] & 8.0 \\[1em] Elasticity\;of\;Supply & \frac { 5.13\% }{ 8.0\% } \\[1em] & 0.64 \end{array}[/latex]

The supply curve is inelastic in this region of the supply curve.

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5.1 Price Elasticity of Demand and Price Elasticity of Supply

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By the end of this section, you will be able to: Calculate the price elasticity of demand Calculate the price elasticity of supply Both the demand and supply curve show the relationship between price and the number of units demanded or supplied.

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A report from the Bank of Canada on changing house prices and the supply and demand response to those prices. It gives a summary of house prices for the past 20 years in Canada and shows a supply increase in correlation with those increased prices.

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A 2020 article on the recent covid pandemic and how a decrease in travel and sales really showcases price elasticity. Obvious things like the travel sector saw a huge decrease in price and demand (-8.6%) and things like toilet paper saw a huge increase (+10.3%).

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Gasoline and Apparel at Opposite Ends of Elasticity Equation

An interesting sidebar to the coronavirus story has been seeing how elastic prices are to dramatic shifts in retail sales and other high-profile categories of economic activity (e.g., in the travel sector). Wider than usual percentage changes have made relationships more apparent.

For July 2020, the U.S. 'All-items' Consumer Price Index was +1.0% year over year, with the 'core' rate of increase at +1.6%. (The 'core' rate eliminates items in the CPI 'basket' that have a history of extreme volatility, mainly in the energy and food spheres.)

It's in specific consumer product categories, however, where the most fascinating results are to be found.

For starters, the retail sales of gasoline stations in July were -15.6% year over year (Graph 1). Much of the explanation lies in the fact the price of petrol in America in the same month was -20.3% y/y (Graph 2).

In the case of gasoline, the price, ‒ which is determined externally based on global demand for oil, ‒ is determining gasoline station receipts. More often, the relationship is the other way around.

For example, among all major shopkeeper categories, the sales of 'clothing and accessory stores' have been performing worst, -20.9% y/y in July. (In June, they had been -23.2% and in May, -63.4%). Therefore, it's no surprise that the 'apparel' sub-index of the CPI in July was -6.5% y/y. In this instance, it's the sharp drop in the sales volume that is setting the price. Discounts are being offered in the hopes of driving more sales.

'Women's dresses' in the July CPI were -23.1% y/y and 'men's suits, sport coats and outerwear', -12.8% y/y. The need to look sharp has been diminished by the 'work from home' pandemic response.

Food and Beverage Consumption and Prices

There is a similar mapping, but in the opposite direction, to be found between food and beverage consumption and their price changes as captured in the CPI survey.

In July, 'food and beverage store' sales in the U.S. were +11.1% y/y. Also, they had been +12.4% in June and +14.5% in May.

Stocking up to ensure cupboards don't run bare has permitted some larger than normal price increases. The 'food at home' sub-index of the CPI in July was +4.6% y/y.

Moreover, some of the largest price changes have come within the 'comfort food' designation: carbonated drinks, +9.2% y/y; 'frankfurters' (hot dogs), +15.7% y/y; 'uncooked ground beef' (hamburgers), +15.0%; and 'snacks', +6.0%. (As to what's in the 'snacks' category, that remains a mystery. It's not specified in the CPI report. Maybe we don't really want to know.)

The price for 'household paper products' (tissues, toilet paper, etc.) sold in grocery stores in July was +10.3% y/y.

Graph 1: U.S. Retail & Food Services Sales Y/Y ‒ July, 2020

'Current' dollars means not adjusted for inflation. Underlying numbers are seasonally adjusted & not 'smoothed'.

Data Source: U.S. Census Bureau.
Chart: ConstructConnect.

Graph 2: U.S. Inflation: All Items (CPI-U) vs All Items Less Food & Energy (i.e., 'Core'*)
(Not Seasonally Adjusted)

The latest data points are for July 2020.
The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
*Core inflation is CPI-U less its often most volatile sub-components, food and energy.

Data source: U.S. Bureau of Labor Statistics (Department of Labor).
Chart: ConstructConnect.

Revenues and Pricing in the Travel Sector, U.S. and Canada

Price changes are identifying where, among sectors, activity levels are chugging along nicely (grocery store sales) or are in the most distress (the travel and accommodation industries).

Due to the world-wide coronavirus outbreak, travel to all corners of the globe has been drastically curtailed. Airlines have been cutting staff, placing pilots on furlough and scrambling (and often failing) to save routes.

With fewer business and tourism travelers, hotel and motel room occupancy rates have fallen to previously unheard-of lows.

Airline and accommodation sector earnings have dropped off alarmingly. Old pricing levels have proven unsustainable.

According to the latest CPI report, 'airline fares' in the U.S. in July were -23.7% y/y. Also, the 'lodging away from home' (i.e., hotel and motel room rates) sub-index was -15.3% y/y.

North of the border, Canada's July CPI results featured the first year-over-year decline (-8.6%) in 'air transport' prices since December 2015, when the cost of jet fuel took a dive.

Canada's sub-index for 'traveler accommodation' in July was -27.0% y/y.

Some Other Notable U.S. Price Changes

The following, in bullet form, are some other notable U.S. year-over-year price changes as set out in July's CPI report.

'Health insurance', +18.7%. This big jump, given the more precarious nature of today's medical services capacity, should come as a surprise to no-one.

'Haircuts and other personal care services', +6.5%. Considerable pent-up demand accumulated in the spring while so many Americans were not venturing out of their homes.

'Sports vehicles, including bicycles', +6.2%. In shopping terms, there's been a run on bicycles as an excuse to go outdoors and stretch one's muscles. Also, a bicycle may make it possible to avoid the infection perils of public transit.

'Photographic equipment and supplies', +5.3%. This year's stay-at-home summer has prompted a search for, or an expansion of, hobby outlets.

'Jewelry', -5.6%. With jobs uncertainty comes a cutback in discretionary spending. At the same time, though, the price of gold has been going through the roof.

'Televisions', -13.8%. Increasing numbers of people (and especially young people) play games or watch their favorite programming on smart phones or laptops.

Canada's Price-Change Ties to Activity Levels Not as Pronounced as in U.S.

Canada's 'All-items' CPI performance was barely elevated year-over-year in July, at just +0.1%, according to Statistics Canada. The country's 'core' rate of inflation was +0.5%.

Canada's price-change ties to activity levels have not been as pronounced as in the U.S. (When, some years from now, academics come to study this phenomenon during COVID-19 days, they'll do better to look at the U.S. data than the Canadian.)

While Canadian 'clothing and accessory' retail sales in June were -21.7% y/y, after being -67.6% in May, the CPI sub-index change for 'women's clothing' in July was a restrained -2.8% y/y, and for 'men's clothing', -3.0% y/y.

Canadian 'food and beverage store' retail sales in June were +11.8% y/y (quite close to the U.S. experience), but the 'food purchased from stores' CPI sub-index was ahead by only +2.4% y/y.

Gasoline was the exception. 'Gasoline station' sales in Canada were -19.6% y/y in July, in keeping with the -14.9% y/y change in price.

Graph 3: Canada Retail Sales Y/Y - June 2020

"Current dollars' means not adjusted for inflation. Underlying numbers are seasonally adjusted & not 'smoothed'.

Data source: Statistics Canada.
Chart: ConstructConnect.

Graph 4: Canada Inflation: All Items CPI vs Core*
(Not Seasonally Adjusted)

The latest data points are for July 2020.
The Canada figure (CPI) is the All Items Consumer Price Index.
*Core inflation is CPI-U less its often most volatile sub-components, food and energy.

Data source: Statistics Canada.
Chart: ConstructConnect.

Graph 5: U.S. vs Canada All-Items Inflation
(CPI & CPI-U Not Seasonally Adjusted)

The latest data points are for July 2020.

Data source: Statistics Canada and U.S. Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 6: U.S. vs Canada Core* Inflation
(CPI Core & CPI-U Less Food and Energy Not Seasonally Adjusted)

The latest data points are for July 2020.
*Core is all-items inflation less its often most volatile sub-components, food and energy.

Data source: Statistics Canada and U.S. Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 7: Inflation Measures (Year-over-Year) U.S. and Canada
Previous Month & Current Month (June & July 2020)

*'Core' inflation for both countries excludes highly volatile items − i.e., mainly food & energy products.

Data sources: Bureau of Labor Statistics & Statistics Canada.
Chart: ConstructConnect.

The Inflation-Interest Rate Plotline

At present, and as is apparent in Graphs 8 and 9, inflation in the U.S. and Canada is falling short of what's considered desirable, +2.0% y/y. But there are reasons to believe the rate of price advance may soon take flight.

Extreme government debt and extraordinary credit easing by central banks are fiscal and monetary forces that, if the past is any guideline, will light a fire under prices.

Plus, material shortages, resulting from de-globalization and corporate bankruptcies, will be a spur to price hikes. Also, retirements of aging workers with unique skill sets ‒ who see the dangers of the coronavirus for their age cohort as a clear message to grab their 'freedom' ‒ pose a replacement challenge for employers, with all that means for wage increases.

What are the knock-on implications of inflation rates that expected to speed up?

Fixed interest rate debt carried by individuals and corporations is generally easier to pay off when inflation is more heated. Returns from rising incomes and pricier-product sales can better handle carrying costs and make inroads into outstanding principal amounts.

Variable interest rate debt, though, as found in personal (e.g., HELOCs - home equity lines of credit) and payroll lines of credit (i.e., to be carried at 'prime' plus a premium), is a story with a different plotline entirely. Faster inflation inevitably drives interest rates upwards and the burden can quickly become formidable.

Graph 8: U.S. Inflation Rate

Based on year-over-year 'All-Items' Consumer Price Index (CPI-U), not seasonally adjusted (NSA).
CPI-U is for 'All Urban Consumers, U.S. City Average'. A desirable rate of inflation is around +2.0% y/y.
Latest data points are for July, 2020.

Data source: Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 9: Canada Inflation Rate

Based on year-over-year 'All-Items' Consumer Price Index (CPI-U), not seasonally adjusted (NSA).
For a variety of reasons, there is a desirable rate of inflation and it's around +2.0% y/y.
Latest data points are for July 2020.

Data source: Statistics Canada.
Chart: ConstructConnect.
Alex Carrick is Chief Economist for ConstructConnect. He has delivered presentations throughout North America on the U.S., Canadian and world construction outlooks. Mr. Carrick has been with the company since 1985. Links to his numerous articles are featured on Twitter @ConstructConnx, which has 50,000 followers.

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Pandemic Shines Spotlight on Price Elasticity - constructconnect.com

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An interesting sidebar to the coronavirus story has been seeing how elastic prices are to dramatic shifts in retail sales and other high-profile categories of economic activity (e.g., in the travel sector). Wider than usual percentage changes have made relationships more apparent. For July 2020, the U.S.

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A graph that shows inelasticity and elasticity. Perfect inelasticity shows no change in quantity demanded when the price changes (eg: gasoline). Perfect elasticity is the perfectly linear case when demand is tied to price and any change in price will drastically change demand (eg: gold). These curves can change depending on the product and how sought after it is.

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Image 2 - Elasticity Chart with Real Examples

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Image 2 - Elasticity Chart with Real Examples

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Various levels of elasticity demand with real world examples.

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1. Nothing here was really that surprising, but I did find it interesting how in-depth some of these calculations can get for such a basic concept. It shows how economists really have to use their math knowledge in their field alongside their knowledge of the market trends and consumer interest.
2. This topic is interesting to me because it shows the value and necessity of certain items. For example, items like gold are expensive and sought after but the second you increase the price the demand falls drastically. This is because there is an accepted price for gold and if you personally increase it, people just won't buy it. However, if you decrease the price, demand shoots way up. This makes sense because gold is a luxury item and not needed. However, if your product doesn't have a fixed, accepted price, you can really test consumer interest for your product by increasing the price and seeing how many people are still interested.
3. I would pass on the basics of this subject like why we see this change of demand/supply for a product when the price for that product increases or decreases. You can get into specific examples that might interest them, like housing supply increasing when price does or even something like the demand of a certain chip brand when the price increases.

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The information here should help you get a better understanding of price elasticity. You'll learn the basics of price elasticity, applications in the real world, some graphs of price elasticity and some example calculations.