unit 3 - elasticity n price elasticity of demand price elasticity of demand m easures the...
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Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Price elasticity of demand mPrice elasticity of demand measures the easures the responsiveness of buyers’ purchasing habits to a responsiveness of buyers’ purchasing habits to a price change.price change.
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Definition:Definition:
Ep = the percentage change in a product’s Ep = the percentage change in a product’s quantity demanded divided by the quantity demanded divided by the percentage change in its price. percentage change in its price.
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Formula:Formula:
(change in Qd / average Qd) (change in Qd / average Qd) (change in Pr / average Pr)(change in Pr / average Pr)
Where Qd = quantity demanded, and Pr = price.Where Qd = quantity demanded, and Pr = price.
Microeconomics
Ep =
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Example 1Example 1Let’s say that a grocery store observes that at $2.00 Let’s say that a grocery store observes that at $2.00
per gallon of milk, buyers purchase 800 gallons per gallon of milk, buyers purchase 800 gallons per day. The next week, the grocery store per day. The next week, the grocery store increases its price to $3.00 per gallon and buyers increases its price to $3.00 per gallon and buyers purchase 700 gallons per day.purchase 700 gallons per day.
What is the price elasticity of demand for milk?What is the price elasticity of demand for milk?
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Example 1 answerExample 1 answer the change in quantity demanded = 100the change in quantity demanded = 100 the average quantity demanded = 750the average quantity demanded = 750 the change in pricethe change in price = $1 = $1 the average pricethe average price = $2.50 = $2.50
100/750100/750 .133.133 $1/$2.50 $1/$2.50 .4.4
MicroeconomicsEp = = .3325
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Example 1 answerExample 1 answerOfficially, the answer is - . 3325, because Officially, the answer is - . 3325, because the quantity demanded decreased (change the quantity demanded decreased (change of -100). However, because price elasticity of -100). However, because price elasticity of demand is always negative, we ignore of demand is always negative, we ignore the negative sign. the negative sign.
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
If a product’s elasticity is less than 1, then we say If a product’s elasticity is less than 1, then we say that it is that it is inelasticinelastic. . If a product’s elasticity is greater than 1, then we If a product’s elasticity is greater than 1, then we say that it is say that it is elasticelastic. . If a product’s elasticity is equal to 1, then we say If a product’s elasticity is equal to 1, then we say that it is that it is unit elasticunit elastic..
Microeconomics
A product with a price elasticity A product with a price elasticity of demand equal to 3.5 is:of demand equal to 3.5 is:
1.1. InelasticInelastic
2.2. Unit elasticUnit elastic
3.3. ElasticElastic
4.4. None of the aboveNone of the above
A product with a price elasticity A product with a price elasticity of demand equal to 3.5 is:of demand equal to 3.5 is:
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1.1. InelasticInelastic
2.2. Unit elasticUnit elastic
3.3. ElasticElastic
4.4. None of the aboveNone of the above
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Example 2Example 2A movie theatre sells 1,800 tickets when it charges A movie theatre sells 1,800 tickets when it charges a price of $11. After it lowers its price to $9, it a price of $11. After it lowers its price to $9, it sells 2,600 tickets. sells 2,600 tickets.
What is the price elasticity of demand for tickets What is the price elasticity of demand for tickets for this movie theatre? for this movie theatre?
Microeconomics
In the previous example (1,800 and In the previous example (1,800 and 2,600 tickets, and price of $11 and $9), 2,600 tickets, and price of $11 and $9), what is the price elasticity of demand?what is the price elasticity of demand?
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1.1. .55.55
2.2. 1.8181.818
3.3. 1.551.55
4.4. 2.832.83
5.5. 5.1515.151
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Example 2 answerExample 2 answer800/2200 800/2200 .3636.36362/102/10 .2.2
Because the value is greater than 1, movie tickets Because the value is greater than 1, movie tickets at this theatre are price elastic.at this theatre are price elastic.
Microeconomics
Ep = = 1.818
Unit 3 - ElasticityUnit 3 - Elasticity
Price Elasticity of DemandPrice Elasticity of Demand
Determinants of price elasticity of demand are:Determinants of price elasticity of demand are: The availability of close substitutes. The more The availability of close substitutes. The more
substitutes, the greater the elasticity.substitutes, the greater the elasticity. The product’s expense to the consumer relative to The product’s expense to the consumer relative to
her/his income or wealth. The higher the expense, the her/his income or wealth. The higher the expense, the greater the elasticity.greater the elasticity.
The period of time under consideration. The longer the The period of time under consideration. The longer the time period, the greater the elasticity.time period, the greater the elasticity.
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity Price Elasticity of DemandPrice Elasticity of Demand
Price elasticity determinants of gasolinePrice elasticity determinants of gasoline The availability of close substitutes. Gasoline does not The availability of close substitutes. Gasoline does not
have many substitutes. This makes gasoline inelastic.have many substitutes. This makes gasoline inelastic. The product’s expense to the consumer relative to The product’s expense to the consumer relative to
her/his income or wealth. For many people gasoline is a her/his income or wealth. For many people gasoline is a considerable expense. This makes gasoline elastic.considerable expense. This makes gasoline elastic.
The period of time under consideration. Within a short The period of time under consideration. Within a short period of time, people cannot change their driving period of time, people cannot change their driving behavior much. This makes gasoline inelastic when behavior much. This makes gasoline inelastic when looking at a short-run demand curve.looking at a short-run demand curve.
Overall, especially in the short run, gasoline is probably Overall, especially in the short run, gasoline is probably inelastic.inelastic.
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity Price Elasticity of DemandPrice Elasticity of Demand
Elasticity and RevenueElasticity and Revenue
Revenue = quantity demanded x priceRevenue = quantity demanded x price
If quantity demanded increases by 10%, and price If quantity demanded increases by 10%, and price decreases by 5% (this means that the product is elastic), decreases by 5% (this means that the product is elastic), then revenue increases. then revenue increases.
Microeconomics
If a product is elastic and its price If a product is elastic and its price decreases, then the supplier’s total decreases, then the supplier’s total
revenue:revenue:1.1. DecreasesDecreases
2.2. IncreasesIncreases
3.3. Stays the sameStays the same
4.4. None of the aboveNone of the above
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If a product is inelastic and its price If a product is inelastic and its price decreases, then the supplier’s total decreases, then the supplier’s total
revenue:revenue:1.1. DecreasesDecreases
2.2. IncreasesIncreases
3.3. Stays the sameStays the same
4.4. None of the aboveNone of the above
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If a product is unit elastic and its price If a product is unit elastic and its price decreases, then the supplier’s total decreases, then the supplier’s total revenue:revenue:
1.1. DecreasesDecreases
2.2. IncreasesIncreases
3.3. Stays the sameStays the same
4.4. None of the aboveNone of the above
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Unit 3 - ElasticityUnit 3 - Elasticity Price Elasticity of DemandPrice Elasticity of Demand
Elasticity and Revenue SummaryElasticity and Revenue Summary If a product is elastic and price increases, then revenue If a product is elastic and price increases, then revenue
decreases.decreases. If a product is inelastic and price increases, then If a product is inelastic and price increases, then
revenue increases. revenue increases. If a product is elastic and price decreases, then revenue If a product is elastic and price decreases, then revenue
increases.increases. If a product is inelastic and price decreases, then If a product is inelastic and price decreases, then
revenue decreases.revenue decreases. If a product is unit elastic and price changes, then If a product is unit elastic and price changes, then
revenue stays the same.revenue stays the same.
Microeconomics
When you graph a demand curve, you notice When you graph a demand curve, you notice that a flatter (closer to horizontal) demand that a flatter (closer to horizontal) demand curve is associated with a:curve is associated with a:
1.1. Higher price Higher price elasticity of demandelasticity of demand
2.2. Lower price Lower price elasticity of demandelasticity of demand
3.3. Perfectly inelastic Perfectly inelastic demand situationdemand situation
4.4. None of the aboveNone of the above
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Price
Quantity
D1 (inelastic demand curve)
$9.00
60
D2 (elastic demand curve)
$8.00
68 100
Unit 3 - ElasticityUnit 3 - Elasticity
Unit 3 - ElasticityUnit 3 - Elasticity
Elasticity and CompetitionElasticity and Competition
A perfectly competitive firm faces a demand A perfectly competitive firm faces a demand curve which is perfectly elastic (horizontal).curve which is perfectly elastic (horizontal).
The more elastic the product, the flatter the The more elastic the product, the flatter the curve.curve.
Microeconomics
Price
Quantity
D1 (Perfectly Elastic Demand Curve)
$9.00
60
D2 (Perfectly Inelastic Demand Curve)
Unit 3 - ElasticityUnit 3 - Elasticity
Unit 3 - ElasticityUnit 3 - Elasticity
Income Elasticity of DemandIncome Elasticity of Demand
Income elasticity of measures the Income elasticity of measures the responsiveness of buyers’ purchasing habits in responsiveness of buyers’ purchasing habits in response to an response to an incomeincome change. change.
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity
Income Elasticity of DemandIncome Elasticity of Demand
Definition:Definition:
Ei = the percentage change in a Ei = the percentage change in a product’s product’s quantity demanded divided by the quantity demanded divided by the
percentage percentage change in buyers’ incomes.change in buyers’ incomes.
The value can be positive (normal good) or The value can be positive (normal good) or negative (inferior good). negative (inferior good).
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity
Income Elasticity of DemandIncome Elasticity of Demand
Formula:Formula:
(change in Qd / average Qd) (change in Qd / average Qd) (change in Y / average Y)(change in Y / average Y)
Where Qd = quantity demanded, and Y = income.Where Qd = quantity demanded, and Y = income.
Microeconomics
Ei =
Unit 3 - ElasticityUnit 3 - Elasticity Cross Price Elasticity of DemandCross Price Elasticity of Demand
The price change of a substitute or complementary The price change of a substitute or complementary product affects the quantity demanded of the other product affects the quantity demanded of the other substitute or complementary product.substitute or complementary product.
Substitutes have a positive cross price Substitutes have a positive cross price elasticity of demand. Complements elasticity of demand. Complements have a negative cross price elasticity of demand.have a negative cross price elasticity of demand.
Microeconomics
Unit 3 - ElasticityUnit 3 - Elasticity Cross Price Elasticity of DemandCross Price Elasticity of Demand
The formula for cross price elasticity of The formula for cross price elasticity of demand is:demand is:
the % change in the quantity demanded of the % change in the quantity demanded of
product A product A
the % change in the price of related product Bthe % change in the price of related product B
Microeconomics
Ecp =