elasticity of demand part ii chapter 5 d1d1 d1d1 inelastic elastic
TRANSCRIPT
Elasticity of Demand Part II
Chapter 5D1
D1
InelasticElastic
Variety of Demand Curves• Perfectly Inelastic
– Quantity demanded does not respond to price changes
– Ed = 0
• Perfectly Elastic– Quantity demanded changes infinitely with price change
– Ed = ∞
• Unit Elastic– Quantity demanded changes by the same percentage as price
– Ed = 1
D1
D1
Unit Elastic Demand
2. . . . leads to a 22% decrease in quantity demanded.2. . . . leads to a 22% decrease in quantity demanded.2. . . . leads to a 22% decrease in quantity demanded.
Quantity
4
100
4
1000
Price
$5
80
$5
80
1. A 22%increasein price . . .
1. A 22%increasein price . . .
1. A 22%increasein price . . .
DemandDemand
Elasticity = 1
%∆ Qty D-------------- = 1. %∆ P
Elasticity = 1
%∆ Qty D-------------- = 1. %∆ P
%∆ Qty D-------------- = 1. %∆ P
Perfectly Elastic
Quantity0
Price
$4 Demand$4 DemandDemand
2. At exactly $4,consumers willbuy any quantity.
2. At exactly $4,consumers willbuy any quantity.
1. At any priceabove $4, quantitydemanded is zero.
1. At any priceabove $4, quantitydemanded is zero.
3. At a price below $4,quantity demanded is infinite.3. At a price below $4,quantity demanded is infinite.
Elasticity = Infinity
%∆ Qty D
-------------- = ∞. %∆ P
Elasticity = Infinity
%∆ Qty D
-------------- = ∞. %∆ P
%∆ Qty D
-------------- = ∞. %∆ P
Unit Elastic Demand
2. . . . leads to a 22% decrease in quantity demanded.2. . . . leads to a 22% decrease in quantity demanded.2. . . . leads to a 22% decrease in quantity demanded.
Quantity
4
100
4
1000
Price
$5
80
$5
80
1. A 22%increasein price . . .
1. A 22%increasein price . . .
1. A 22%increasein price . . .
DemandDemand
Elasticity = 1
%∆ Qty D-------------- = 1. %∆ P
Elasticity = 1
%∆ Qty D-------------- = 1. %∆ P
%∆ Qty D-------------- = 1. %∆ P
Perfectly Inelastic
$5$5
44
Quantity
Demand
100
DemandDemand
1000
An ↑ Price…An ↑ Price…An ↑ Price…
. . . . leaves quantity demanded unchanged.. . . . leaves quantity demanded unchanged.. . . . leaves quantity demanded unchanged.
Price
Elasticity = 0
%∆ Qty D-------------- = 0. %∆ P
Elasticity = 0
%∆ Qty D-------------- = 0. %∆ P
%∆ Qty D-------------- = 0. %∆ P
Slope versus Elasticity
• Price elasticity of demand is closely related to slope of a demand curve---but it is not the same!
• The Slope of a linear demand curve is constant
• Elasticity changes at each point on line
• All linear demand curves have elastic, unit elastic & inelastic points on the line
Calculating Elasticity(simple method)
Ed > 1 => demand is Price Elastic
$220
$200
Quantity100 8
Price
D1
A
B
Prices rises from $200 to $220 % ∆ Qty D
Ed = -------------- .
% ∆ P
( )
( . . ).
1 0 81 0
1 0 0
2 2 0 2 0 02 0 0
1 0 0
2 0 %
1 0 %2
(8 – 10)
Problems withSimple Elasticity Calculation
• The simple % method leads to different results based on the direction of the quantity change
(
( . . )
.
10
8100
2 00 2 20
2 20100
25%
9%2.7
#1) Qty Falls 10 → 8
$220
$200
Quantity100 8
Price
D1
A
B
#2) Qty Rises 8 → 10
( )
( . . ).
1 0 81 0
1 0 0
2 2 0 2 0 02 0 0
1 0 0
2 0 %
1 0 %2
(8 – 10)
Mid-Point Method
• The mid-point method achieves the same elasticity calculation regardless of direction of price change – Use the mid-point formula for all test calculations:
2 .
(10+8)/2 22%------------------ = ----- = 2.3 .2 . 9.5%
(2.2+2)/2
$220
$200
Quantity100 8
Price
D1
A
B
%∆ in Qty = ∆ Q/[(Q1 + Q2)/2]--------------- -------------------------
% ∆ in Price = ∆ P/[(P1 + P2)/2]
Elasticity of Demand Practice Test
Stock Market 2014
Macro Stories Micro Stories 2013 Data
Stock Market = +29.6% p.e. ratio = 20GDP = +2.1%Unemployment = 7.0%Labor Participation = 30 year lowDebt = 17.3 Trillion10yr bond = 3.0% Fed Funds = 0.0%Europe = still in recessionChina = facing inflationFed = New chairperson, taper of QE