ELASTICTY AND THE OFFER CURVE

A feature previously neglected in this chapter is the precise shape of the offer curve,
and the shape is important because it in influences the impacts of shifts in offer curves. The
shape can be discussed in terms of the general concept of elasticity. The elasticity of an offer
curve at various points can be defined in several ways, but we shall present the most common
definition. It deals with the elasticity of demand for imports along the curve, which is the
percentage change in the quantity of imports. This definition is analogous to the usual
definition of price elasticity of demand, except that it refers to the relative price of the good
instead of to an absolute price.

Geometrically, the import-demand elasticity can be measured as follows. (The proof

involves mathematical manipulation shown in Appendix A at the end of this chapter). On the
offer curves OCT in the figure 8, consider any point P. From this point, drop a perpendicular
line to the horizontal axis and draw a tangent to P that also hits the horizontal axis. The
elsticity is measured as the horizontal distancee from the origin 0 to the intersection of the
perpendicular line. In figure 8, the import-demand elasticity is thus 0R/0S. (Technically, a
negative sign is in front of this measure, which we will disregard in our discussion). The three
parts of Figure 8 illusrate the three classifications associated with elasticity. In panel (a),
0R/0S > 1 because 0R is a longer distance than 0S, and the offer curve is referred to as
“elastics” at points on this upward-slopping range. In panel (b), distance 0R is shorter than
distance 0S; thus the fraction 0R/0S < 1. The offer curve in this downward-slopping or
backward-bending portion is “inelastic”. In panel (c), 0R = 0S (the perpendicular and the
tangent are the same line), so the offer curve “unit-elastic” at point P.

The total offer curve as usually drawn has three ranges like those in panels (a), (b),
and (c) in Figure 8. In panel (c), the offer curve is “elastic” at all points from the origin to
point P. This is the way offer curves have been drawn heretofore in this chapter. From point P
to point W (in the limiting case, W could be on the vertical axis), the offer curve is
“inelastic”. The offer curve at point P itself is “unit elastic.” The use of elastic-inelastic-unit-
elastic in this offer curve context parallels its use in ordinary demand curve analysis. When a
country is located in the “elastic” range of its offer curve, a given percentage change in the
relative price of that country’s import good will induce a greater percentage change in the
quantity of imports purchased. When the country is located in the “inelastic” range, a given
percentage change in the relative price of imports will induce a smaller percentage change in
the quantity of imports purchased. Finally, in the “unit-elastic” range, a given percentage
change in the relative price of imports will induce an equal percentage change in the quantity
of imports.

These elasticity ranges give a clue to the reason for the shape of the offer curve.
Recall that an “elastic” demand means that if the price of a good falls, total spending (or total
revenue, price times quantity) will rise because the percentage increase in quantity is greater
than the percentage decrease in price. In the “inelastic” demand situation, a fall in price is
associated with a fall in total spending on the good (total revenue) because the percentage
increase in quantity is less than the percentage decrease in price. Finally, if demand is “unit-
elastic”, then a fall in price will produce no change in total revenue because the percentage
increase n quantity matches the percentage decrease in price.

The relationship of total spending or revenue change to the elasticity is relevant to the
shape of the offer curve. The important point is that a country gives up its exports good to be
able