1、Elasticity and Its ApplicationChapter 5Copyright 2001 by Harcourt,Inc.All rights reserved.Requests for permission to make copies of any part of thework should be mailed to:Permissions Department,Harcourt College Publishers,6277 Sea Harbor Drive,Orlando,Florida 32887-6777.Harcourt,Inc.items and deriv
2、ed items copyright 2001 by Harcourt,Inc.Elasticity.u is a measure of how much buyers and sellers respond to changes in market conditions u allows us to analyze supply and demand with greater precision.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Price Elasticity of DemanduPric
3、e elasticity of demand is the percentage change in quantity demanded given a percent change in the price.uIt is a measure of how much the quantity demanded of a good responds to a change in the price of that good.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Determinants of Pri
4、ce Elasticity of DemanduNecessities versus LuxuriesuAvailability of Close SubstitutesuDefinition of the MarketuTime HorizonHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Determinants of Price Elasticity of DemandDemand tends to be more elastic:uif the good is a luxury.uthe longe
5、r the time period.uthe larger the number of close substitutes.uthe more narrowly defined the market.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the Price Elasticity of DemandThe price elasticity of demand is computed as the percentage change in the quantity demanded
6、 divided by the percentage change in price.Price Elasticity of Demand=Percentage Changein Quantity DemandedPercentage Changein PricePrice Elasticity of Demand=Percentage Changein Quantity DemandedPercentage Changein PriceHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing t
7、he Price Elasticity of Demandprice inchange Percentagedemandedquatity inchange Percentagedemand of elasticityPrice Example:If the price of an ice cream cone increases from$2.00 to$2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:2percent10per
8、cent2010000200220210010810.).()(Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the Price Elasticity of Demand Using the Midpoint FormulaThe midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the
9、 direction of the change.)/2P)/(PP(P)/2Q)/(QQ(Q=Demand of Elasticity Price12121212Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the Price Elasticity of DemandExample:If the price of an ice cream cone increases from$2.00 to$2.20 and the amount you buy falls from 10 to
10、8 cones the your elasticity of demand,using the midpoint formula,would be calculated as:32.25.9222/)20.200.2()00.220.2(2/)810()810(percentpercent)/2P)/(PP(P)/2Q)/(QQ(Q=Demand of Elasticity Price12121212Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Ranges of ElasticityInelastic
11、DemanduQuantity demanded does not respond strongly to price changes.uPrice elasticity of demand is less than one.Elastic DemanduQuantity demanded responds strongly to changes in price.uPrice elasticity of demand is greater than one.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.
12、Computing the Price Elasticity of DemandDemand is price elastic$54DemandQuantity1000Price50-3percent 22-percent 67 5.00)/2(4.005.00)-(4.0050)/2(10050)-(100EDHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Ranges of ElasticityuPerfectly InelasticQuantity demanded does not respond
13、to price changes.uPerfectly ElasticQuantity demanded changes infinitely with any change in price.uUnit ElasticQuantity demanded changes by the same percentage as the price.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.A Variety of Demand CurvesBecause the price elasticity of de
14、mand measures how much quantity demanded responds to the price,it is closely related to the slope of the demand curve.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Inelastic Demand-Elasticity equals 0QuantityPrice4$5Demand1002.leaves the quantity demanded unchanged.1.
15、Anincreasein price.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Inelastic Demand-Elasticity is less than 1QuantityPrice4$51.A 22%increasein price.Demand100902.leads to a 11%decrease in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Unit Elastic De
16、mand-Elasticity equals 1QuantityPrice4$51.A 22%increasein price.Demand100802.leads to a 22%decrease in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elastic Demand-Elasticity is greater than 1QuantityPrice4$51.A 22%increasein price.Demand100502.leads to a 67%decrease i
17、n quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Elastic Demand-Elasticity equals infinityQuantityPriceDemand$41.At any priceabove$4,quantitydemanded is zero.2.At exactly$4,consumers willbuy any quantity.3.At a price below$4,quantity demanded is infinite.Harco
18、urt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total RevenueuTotal revenue is the amount paid by buyers and received by sellers of a good.uComputed as the price of the good times the quantity sold.TR=P x QHarcourt,Inc.items and derived items copyright 2001 by Harcourt,
19、Inc.$4DemandQuantityP0PriceP x Q=$400(total revenue)100QElasticity and Total RevenueHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total RevenueWith an inelastic demand curve,an increase in price leads to a decrease in quantity that is proportionately smaller.Thus
20、,total revenue increases.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total Revenue:Inelastic Demand$3Quantity0Price80Revenue=$240 Demand$1DemandQuantity0Revenue=$100100 PriceAn increase in price from$1 to$3.leads to an increase in total revenue from$100 to$240H
21、arcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total RevenueWith an elastic demand curve,an increase in the price leads to a decrease in quantity demanded that is proportionately larger.Thus,total revenue decreases.Harcourt,Inc.items and derived items copyright 200
22、1 by Harcourt,Inc.Elasticity and Total Revenue:Elastic DemandDemandQuantity0Price$450DemandQuantity0PriceRevenue=$100$520Revenue=$200 An increase in price from$4 to$5.leads to a decrease in total revenue from$200 to$100Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the
23、 Elasticity of a Linear Demand CurvePriceQuantityTotal Revenue(Price xQuantity)Percent Change in PricePercent Changein QuantityElasticityDescription$014$0200%15%0.1Inelastic1121267180.3Inelastic2102040220.6Inelastic382429291Unit elastic462422401.8elastic542018673.7elastic62121520013elastic700 Harcou
24、rt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Income Elasticity of DemanduIncome elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers income.uIt is computed as the percentage change in the quantity demanded divided by the percentage
25、 change in income.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing Income ElasticityIncome Elasticityof DemandPercentage Change in Quantity DemandedPercentage Change in Income=Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Income Elasticity-Types of
26、Goods-uNormal GoodsuInferior GoodsuHigher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Income Elasticity-Types of Goods-uGoods consumers regard as necessities tend to be in
27、come inelasticExamples include food,fuel,clothing,utilities,and medical services.uGoods consumers regard as luxuries tend to be income elastic.Examples include sports cars,furs,and expensive foods.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Price Elasticity of SupplyuPrice el
28、asticity of supply is the percentage change in quantity supplied resulting from a percent change in price.uIt is a measure of how much the quantity supplied of a good responds to a change in the price of that good.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Ranges of Elastici
29、tyuPerfectly ElasticES=uRelatively ElasticES 1uUnit ElasticES=1Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Ranges of ElasticityuRelatively InelasticES 1uPerfectly InelasticES=0 Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Inelastic Supply-Elas
30、ticity equals 0QuantityPrice4$5Supply1002.leaves the quantity supplied unchanged.1.Anincreasein price.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Inelastic Supply-Elasticity is less than 1QuantityPrice4$51.A 22%increasein price.110100Supply2.leads to a 10%increase in quantity
31、.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Unit Elastic Supply-Elasticity equals 1QuantityPrice4$51.A 22%increasein price.125100Supply2.leads to a 22%increase in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elastic Supply-Elasticity is greate
32、r than 1QuantityPrice4$51.A 22%increasein price.200100Supply2.leads to a 67%increase in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Elastic Supply-Elasticity equals infinityQuantityPriceSupply$41.At any priceabove$4,quantitysupplied is infinite.2.At exactly
33、$4,producers willsupply any quantity.3.At a price below$4,quantity supplied is zero.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Determinants of Elasticity of SupplyuAbility of sellers to change the amount of the good they produce.uBeach-front land is inelastic.uBooks,cars,or
34、manufactured goods are elastic.uTime period.uSupply is more elastic in the long run.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the Price Elasticity of SupplyThe price elasticity of supply is computed as the percentage change in the quantity supplied divided by the
35、percentage change in price.Elasticity of Supply=Percentage Change in Quantity SuppliedPercentage Change in PriceElasticity of Supply=Percentage Change in Quantity SuppliedPercentage Change in PriceHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Application of ElasticityuCan good
36、news for farming be bad news for farmers?uWhat happens to wheat farmers and the market for wheat when university agronomists discover a new wheat hybridthat is more productive than existing varieties?Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Application of ElasticityuExamin
37、e whether the supply or demand curve shifts.uDetermine the direction of the shift of the curve.uUse the supply-and-demand diagram to see how the market equilibrium changes.An Increase in Supply in the Market for Wheat$3Quantity of Wheat1000Price ofWheatDemandS1Harcourt,Inc.items and derived items co
38、pyright 2001 by Harcourt,Inc.3.and a proportionately smallerincrease in quantity sold.As a result,revenue falls from$300 to$220.An Increase in Supply in the Market for Wheat$3Quantity of Wheat1000Price ofWheat1.When demand is inelastic,an increase in supply.DemandS1S221102.leadsto a large fall in pr
39、ice.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Compute Elasticity-0.240.40.095-2.00)/2(3.002.00-3.00110)/2(100110-100=EDHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Compute Elasticity-
40、0.240.40.095-2.00)/2(3.002.00-3.00110)/2(100110-100=EDDemand is inelasticHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.SummaryuPrice elasticity of demand measures how much the quantity demanded responds to changes in the price.uIf a demand curve is elastic,total revenue falls w
41、hen the price rises.uIf it is inelastic,total revenue rises as the price rises.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.SummaryuThe price elasticity of supply measures how much the quantity supplied responds to changes in the price.uIn most markets,supply is more elastic i
42、n the long run than in the short run.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Graphical ReviewHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the Price Elasticity of DemandDemand is price elastic$54DemandQuantity1000Price50-3percent 22-percent
43、 67 5.00)/2(4.005.00)-(4.0050)/2(10050)-(100EDHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Inelastic Demand-Elasticity equals 0QuantityPrice4$5Demand1002.leaves the quantity demanded unchanged.1.Anincreasein price.Harcourt,Inc.items and derived items copyright 2001 b
44、y Harcourt,Inc.Inelastic Demand-Elasticity is less than 1QuantityPrice4$51.A 22%increasein price.Demand100902.leads to a 11%decrease in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Unit Elastic Demand-Elasticity equals 1QuantityPrice4$51.A 22%increasein price.Demand10
45、0802.leads to a 22%decrease in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elastic Demand-Elasticity is greater than 1QuantityPrice4$51.A 22%increasein price.Demand100502.leads to a 67%decrease in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcou
46、rt,Inc.Perfectly Elastic Demand-Elasticity equals infinityQuantityPriceDemand$41.At any priceabove$4,quantitydemanded is zero.2.At exactly$4,consumers willbuy any quantity.3.At a price below$4,quantity demanded is infinite.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.$4DemandQ
47、uantityP0Price 100QElasticity and Total RevenueHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total Revenue:Inelastic Demand$3Quantity0Price80Revenue=$240 Demand$1DemandQuantity0Revenue=$100100 PriceAn increase in price from$1 to$3.leads to an increase in total re
48、venue from$100 to$240Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total Revenue:Elastic DemandDemandQuantity0Price$450DemandQuantity0PriceRevenue=$100$520Revenue=$200 An increase in price from$4 to$5.leads to a decrease in total revenue from$200 to$100Harcourt,I
49、nc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Inelastic Supply-Elasticity equals 0QuantityPrice4$5Supply1002.leaves the quantity supplied unchanged.1.Anincreasein price.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Inelastic Supply-Elasticity is less than
50、1QuantityPrice4$51.A 22%increasein price.110100Supply2.leads to a 10%increase in quantity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Unit Elastic Supply-Elasticity equals 1QuantityPrice4$51.A 22%increasein price.125100Supply2.leads to a 22%increase in quantity.Harcourt,Inc.i
