1、Copyright 2004 South-WesternElasticity and Its Applications(Principles of Economics,Chapter 5)Copyright 2004 South-Western/Thomson LearningElasticity.allows us to analyze supply and demand with greater precision.is a measure of how much buyers and sellers respond to changes in market conditions Copy
2、right 2004 South-Western/Thomson LearningTHE ELASTICITY OF DEMAND Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.Price elasticity of demand is the percentage change in quantity demanded given a percent change in the
3、price.Copyright 2004 South-Western/Thomson LearningThe Price Elasticity of Demand and Its Determinants Availability of Close Substitutes Necessities versus Luxuries Definition of the Market Time HorizonCopyright 2004 South-Western/Thomson LearningThe Price Elasticity of Demand and Its Determinants D
4、emand tends to be more elastic:the larger the number of close substitutes.if the good is a luxury.the more narrowly defined the market.the longer the time period.Copyright 2004 South-Western/Thomson LearningComputing the Price Elasticity of Demand The price elasticity of demand is computed as the pe
5、rcentage change in the quantity demanded divided by the percentage change in price.Price elasticity of demand=Percentage change in quantity demandedPercentage change in priceCopyright 2004 South-Western/Thomson LearningThe Midpoint Method:A Better Way to Calculate Percentage Changes and Elasticities
6、 The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.Price elasticity of demand=()/()/()/()/QQQQPPPP2121212122Copyright 2004 South-Western/Thomson LearningThe Midpoint Method:A Better Way to Cal
7、culate Percentage Changes and Elasticities 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,using the midpoint formula,would be calculated as:()()/(.)(.)/.1081082220200200220222%95%232Copyright 2004 S
8、outh-Western/Thomson LearningThe Variety of Demand Curves Inelastic Demand Quantity demanded does not respond strongly to price changes.Price elasticity of demand is less than one.Elastic Demand Quantity demanded responds strongly to changes in price.Price elasticity of demand is greater than one.Co
9、pyright 2004 South-Western/Thomson LearningComputing the Price Elasticity of DemandDemand is price elastic$54DemandQuantity100050-3percent 22-percent 67 5.00)/2(4.005.00)-(4.0050)/2(10050)-(100EDPriceCopyright 2004 South-Western/Thomson LearningThe Variety of Demand Curves Perfectly Inelastic Quanti
10、ty demanded does not respond to price changes.Perfectly Elastic Quantity demanded changes infinitely with any change in price.Unit Elastic Quantity demanded changes by the same percentage as the price.Copyright 2004 South-Western/Thomson LearningThe Variety of Demand Curves Because the price elastic
11、ity of demand measures how much quantity demanded responds to the price,it is closely related to the slope of the demand curve.Figure 1 The Price Elasticity of DemandCopyright2003 Southwestern/Thomson Learning(a)Perfectly Inelastic Demand:Elasticity Equals 0$54QuantityDemand10001.Anincreasein price.
12、2.leaves the quantity demanded unchanged.PriceFigure 1 The Price Elasticity of Demand(b)Inelastic Demand:Elasticity Is Less Than 1Quantity0$590Demand1.A 22%increasein price.Price2.leads to an 11%decrease in quantity demanded.4100Figure 1 The Price Elasticity of DemandCopyright2003 Southwestern/Thoms
13、on Learning2.leads to a 22%decrease in quantity demanded.(c)Unit Elastic Demand:Elasticity Equals 1Quantity41000Price$5801.A 22%increasein price.DemandFigure 1 The Price Elasticity of Demand(d)Elastic Demand:Elasticity Is Greater Than 1DemandQuantity41000Price$5501.A 22%increasein price.2.leads to a
14、 67%decrease in quantity demanded.Figure 1 The Price Elasticity of Demand(e)Perfectly Elastic Demand:Elasticity Equals InfinityQuantity0Price$4Demand2.At exactly$4,consumers willbuy any quantity.1.At any priceabove$4,quantitydemanded is zero.3.At a price below$4,quantity demanded is infinite.Copyrig
15、ht 2004 South-Western/Thomson LearningTotal Revenue and the Price Elasticity of Demand Total revenue is the amount paid by buyers and received by sellers of a good.Computed as the price of the good times the quantity sold.TR=P x QFigure 2 Total RevenueCopyright2003 Southwestern/Thomson LearningDeman
16、dQuantityQP0Price P Q=$400(revenue)$4100Copyright 2004 South-Western/Thomson LearningElasticity and Total Revenue along a Linear Demand Curve With an inelastic demand curve,an increase in price leads to a decrease in quantity that is proportionately smaller.Thus,total revenue increases.Figure 3 How
17、Total Revenue Changes When Price Changes:Inelastic DemandCopyright2003 Southwestern/Thomson LearningDemandQuantity0PriceRevenue=$100 Quantity0PriceRevenue=$240 Demand$1100$380An Increase in price from$1 to$3 leads to an Increase in total revenue from$100 to$240Copyright 2004 South-Western/Thomson Le
18、arningElasticity and Total Revenue along a Linear Demand Curve With an elastic demand curve,an increase in the price leads to a decrease in quantity demanded that is proportionately larger.Thus,total revenue decreases.Figure 4 How Total Revenue Changes When Price Changes:Elastic DemandCopyright2003
19、Southwestern/Thomson LearningDemandQuantity0PriceRevenue=$200$450DemandQuantity0PriceRevenue=$100$520An Increase in price from$4 to$5 leads to an decrease in total revenue from$200 to$100Copyright 2004 South-Western/Thomson LearningElasticity of a Linear Demand CurveCopyright 2004 South-Western/Thom
20、son LearningIncome Elasticity of Demand Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers income.It is computed as the percentage change in the quantity demanded divided by the percentage change in income.Income elasticity of demand=Perce
21、ntage change in quantity demandedPercentage change in incomeCopyright 2004 South-Western/Thomson LearningIncome Elasticity Types of Goods Normal Goods(+)Inferior Goods(-)Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.Copyright 2004 Sou
22、th-Western/Thomson LearningIncome Elasticity Goods consumers regard as necessities tend to be income inelastic Examples include food,fuel,clothing,utilities,and medical services.Goods consumers regard as luxuries tend to be income elastic.Examples include sports cars,furs,and expensive foods.Copyrig
23、ht 2004 South-Western/Thomson LearningTHE ELASTICITY OF SUPPLY Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change i
24、n price.Figure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson Learning(a)Perfectly Inelastic Supply:Elasticity Equals 0$54SupplyQuantity10001.Anincreasein price.2.leaves the quantity supplied unchanged.PriceFigure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson
25、 Learning(b)Inelastic Supply:Elasticity Is Less Than 1110$51004Quantity01.A 22%increasein price.Price2.leads to a 10%increase in quantity supplied.SupplyFigure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson Learning(c)Unit Elastic Supply:Elasticity Equals 1125$51004Quantity0Price
26、2.leads to a 22%increase in quantity supplied.1.A 22%increasein price.SupplyFigure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson Learning(d)Elastic Supply:Elasticity Is Greater Than 1Quantity0Price1.A 22%increasein price.2.leads to a 67%increase in quantity supplied.4100$5200Sup
27、plyFigure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson Learning(e)Perfectly Elastic Supply:Elasticity Equals InfinityQuantity0Price$4Supply3.At a price below$4,quantity supplied is zero.2.At exactly$4,producers willsupply any quantity.1.At any priceabove$4,quantitysupplied is i
28、nfinite.Copyright 2004 South-Western/Thomson LearningDeterminants of Elasticity of Supply Ability of sellers to change the amount of the good they produce.Beach-front land is inelastic.Books,cars,or manufactured goods are elastic.Time period.Supply is more elastic in the long run.Copyright 2004 Sout
29、h-Western/Thomson LearningComputing the Price Elasticity of Supply The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.Price elasticity of supply=Percentage change in quantity suppliedPercentage change in priceCopyright 2004 South-Western/Thomson LearningCross-price Elasticity Percentage change in Qd of good A Percentage change in P of good B Positive means in P of B increase demand of A substitute goods Negative implies in P of B decrease demand of A complimentary goods
