eco 202.f01.chap5.elasticity
TRANSCRIPT
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
1/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Elasticity . . .
Demand elasticity is a measure of how
much buyersrespondto changes price,income, and other things.
Supply elasticity is a measure of how
much sellers respond to changes in price
and other things.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
2/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Flavors of elasticity
Price Elasticity of Demand
Income Elasticity of Demand
Advertising Elasticity of Demand
Price Elasticity of Supply
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
3/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price Elasticity of Demand
Price elasticity of demand:
the percent change in quantitydemanded in response to a
percent change in price.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
4/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price Elasticity of DemandDemand tends to be more elastic :
The larger the number of close
substitutes.
the longer the time period. the more narrowly defined the market.
If the good is a luxury.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
5/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Computing the Price Elasticity
of Demand: A First Approach
priceinchangePercentage
demandedquatityinchangePercentagedemandofelasticityPrice
Example: If the price of an ice cream cone increasesfrom $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your price elasticity of demand is:
210
20
10000.2
)00.220.2(
10010
)108(
percent
percent
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
6/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Computing the Price Elasticity
of Demand: Mid Point Method
Demand is price elastic
$5
4 Demand
Quantity1000
Price
50
-3percent22-
percent67
5.00)/2(4.00
5.00)-(4.00
50)/2(10050)-(100
ED
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
7/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Perfectly Inelastic Demand
Qty demanded doesnt respond to price
Elasticity=0
Quantity
Price
4
$5
Demand
1002. ...leaves the quantity demanded unchanged.
1. Anincreasein price...
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
8/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Inelastic DemandA large percent change in price A small
percent change in quantity demandedElasticity < 1
Quantity
Price
4
$51. A 22%increasein price...
Demand
100902. ...leads to a 11% decrease in quantity.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
9/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Unit Elastic DemandEach 1% increase in price a 1% decrease in
quantity demanded
Elasticity = 1
Quantity
Price
4
$51. A 22%increasein price...
Demand
100802. ...leads to a 22% decrease in quantity.
t
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
10/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
ast c emanSmall increase in price big decrease in
quantity demanded
Elasticity > 1
Quantity
Price
4
$51. A 22%increasein price...
Demand
100502. ...leads to a 67% decrease in quantity.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
11/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Perfectly Elastic DemandThe smallest change in price Huge
change in quantity demanded
Elasticity is INFINITE
Quantity
Price
Demand$4
At exactly $4, consumers will buy any quantityand they wont pay a cent moretheyll buy something else if price rises at all.
Demand facing a competitive firm.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
12/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price Elasticity and Total
RevenueTotal revenue is the price of a good
multiplied by the quantity sold.
TR = P x Q
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
13/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
$4
Demand
Quantity
P
0
Price
P xQ= $400
(total revenue)
100Q
Total Revenue: A Picture
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
14/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Elasticity and Total Revenue
With inelastic demand, anincrease in price leads to a
smalldecrease in quantitydemanded.
Total revenue increases
when price rises.P x Q Increases when P rises
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
15/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Elasticity and Total Revenue
With elastic demand, a small
increase in price leads to a bigdecrease in quantity demanded.
Total revenue decreaseswhen price rises.
P x Q decreases when P rises
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
16/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Elasticity and Total Revenue:
Elastic Demand
Demand
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
Revenue = $200
An increase in price
from $4 to $5...
leads to a decrease
in total revenue
from$200 to $100
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
17/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Income Elasticity of Demand
Quantity demanded responds to
consumer income.
Income elasticity of demand:
percentage change in quantity
demanded divided by the percentage
change in income.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
18/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Computing Income Elasticity
Income Elasticity
of Demand
Percentage Changein Quantity Demanded
Percentage Changein Income
=
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
19/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Income Elasticity
- Types of Goods -Necessities are income inelastic
Examples: food, fuel, clothing, utilities,
medical care.
Luxuries areincome elastic.
Examples: sports cars, jewelry,
gourmet foods.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
20/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Use the midpoint method to calculate your price elasticity of demand as
the price of compact discs increases from $8 to $10 if (i) your income is
$10,000, and (ii) your income is $12,000.
[(40 32)/36] / [(8-10)/9] = [2/9]/[2/9] = 1
[(50-45)/47.5]/ [(8-10)/9] = 10.5% / 22.2% = .47
Calculate your income elasticity of demand as your income increases
from $10,000 to $12,000 if (i) the price is $12, and (ii) the price is $16.
[(30 24)/27]/[(10-12)/11] = 22.2% / 18.2 % = 1.22
[(12 8)/10 ]/[(10-12)/11] = 40% / 18.2 % = 2.2
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
21/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price Elasticity of Supply
Quantity supplied responds to price.
Price elasticity of supply
the percentage change in quantitysupplied resulting from a percent
change in price.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
22/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Computing the Price Elasticity
of SupplyThe percentage change in quantity
supplied divided by the percentagechange in price.
Elasticity of Supply =Percentage Change inQuantity Supplied
Percentage Changein Price
Elasticity of Supply =Percentage Change inQuantity Supplied
Percentage Changein Price
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
23/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Perfectly Inelastic SupplyElasticity equals 0
Quantity
Price
4
$5
Supply
1002. ...leaves the quantity supplied unchanged.
1. Anincreasein price...
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
24/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Inelastic SupplyElasticity < 1
Quantity
Price
4
$51. A 22%increasein price...
110100
Supply
2. ...leads to a 9 % increase in quantity supplied.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
25/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Unit Elastic SupplyElasticity equals 1
Quantity
Price
4
$51. A 22%increasein price...
125100
Supply
2. ...leads to a 22% increase in quantity.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
26/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Elastic Supply
Elasticity > 1
Quantity
Price
4
$51. A 22%increasein price...
200100
Supply
2. ...leads to a 67% increase in quantity.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
27/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Perfectly Elastic Supply
Elasticity equals infinity
Quantity
Price
Supply$4
At exactly $4,
producers willsupply any quantity.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
28/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Determinants of
Elasticity of SupplyAbility of sellers to change the amount theyproduce
Beach-front land is inelastic. Books, cars, or manufactured goods are elastic.
Time period
Supply is more elastic in the long runthan in the short run.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
29/40
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price ofWheat
Demand
S1
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
30/40
3. ...and a proportionately smaller
increase in quantity sold. As a result,revenue falls from $300 to $220.
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price ofWheat 1. When demand is inelastic,
an increase in supply...
Demand
S1 S2
2
110
2. ...leadsto a largefall inprice...
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
31/40
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
32/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Summary
The price elasticity of supply measures
how much the quantity supplied
responds to changes in the price.
In most markets, supply is more elastic
in the long run than in the short run.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
33/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
GraphicalReview
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
34/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Computing the Price Elasticity
of Demand
Demand is price elastic
$54 Demand
Quantity1000
Price
50
-3percent22-
percent67
5.00)/2(4.005.00)-(4.00
50)/2(10050)-(100
ED
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
35/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Elasticity and Total Revenue:
Inelastic Demand Qddoesnt
change much when price rises
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
leads to an increase
in total revenue
from$100 to $240
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
36/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Elasticity and Total Revenue
Elastic Demand Qd changes
a lot when price rises
Demand
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
Revenue = $200
An increase in price
from $4 to $5...
leads to a decrease
in total revenue
from$200 to $100
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
37/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Perfectly Inelastic Supply- Elasticity equals 0
Quantity
Price
4
$5
Supply
1002. ...leaves the quantity supplied unchanged.
1. Anincreasein price...
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
38/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Inelastic Supply
- Elasticity is less than 1
Quantity
Price
4
$51. A 22%increasein price...
110100
Supply
2. ...leads to a 10% increase in quantity.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
39/40
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Unit Elastic Supply
- Elasticity equals 1
Quantity
Price
4
$51. A 22%increasein price...
125100
Supply
2. ...leads to a 22% increase in quantity.
-
7/30/2019 Eco 202.f01.Chap5.Elasticity
40/40
Elastic Supply
- Elasticity is greater than 1
Quantity
Price
4
$51. A 22%increasein price...
200100
Supply
2. ...leads to a 67% increase in quantity.