1、Copyright 2004 South-WesternElasticity and Its ApplicationsCopyright 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 Copyright 2004 South-Western/Thomson Le
2、arningTHE 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 price.Copyright 2004 South-Western/
3、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 Demand tends to be more elastic:the
4、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 percentage change in the quantity dem
5、anded divided by the percentage change in price.Price elasticity of demand=Percentage change in quantity demandedPercentage change in priceCopyright 2004 South-Western/Thomson Learning 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 con
6、es,then your elasticity of demand would be calculated as:Computing the Price Elasticity of DemandPrice elasticity of demand=Percentage change in quantity demandedPercentage change in price()(.).1081010022020020010020%10%2Copyright 2004 South-Western/Thomson LearningThe Midpoint Method:A Better Way t
7、o Calculate Percentage Changes and Elasticities 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
8、LearningThe Midpoint Method:A Better Way to Calculate 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:()()/(.)(.)
9、/.1081082220200200220222%95%232Copyright 2004 South-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.Pr
10、ice elasticity of demand is greater than one.Copyright 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 Vari
11、ety of Demand Curves Perfectly Inelastic Quantity 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 Var
12、iety of Demand Curves Because the price elasticity 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 Equ
13、als 0$54QuantityDemand10001.Anincreasein price.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 Elast
14、icity of DemandCopyright2003 Southwestern/Thomson 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 1DemandQuantity410
15、00Price$5501.A 22%increasein price.2.leads to a 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 pric
16、e below$4,quantity demanded is infinite.Copyright 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 RevenueC
17、opyright2003 Southwestern/Thomson LearningDemandQuantityQP0Price 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 sma
18、ller.Thus,total revenue increases.Figure 3 How 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$10
19、0 to$240Copyright 2004 South-Western/Thomson LearningElasticity 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
20、When Price Changes:Elastic DemandCopyright2003 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 Linea
21、r Demand CurveCopyright 2004 South-Western/Thomson 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 cha
22、nge in income.Copyright 2004 South-Western/Thomson Learning Computing Income ElasticityIncome elasticity of demand=Percentage change in quantity demandedPercentage change in incomeCopyright 2004 South-Western/Thomson LearningIncome Elasticity Types of Goods Normal Goods Inferior Goods Higher income
23、raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.Copyright 2004 South-Western/Thomson LearningIncome Elasticity Goods consumers regard as necessities tend to be income inelastic Examples include food,fuel,clothing,utilities,and medical services.Goods
24、consumers regard as luxuries tend to be income elastic.Examples include sports cars,furs,and expensive foods.Copyright 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
25、that good.Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.Figure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson Learning(a)Perfectly Inelastic Supply:Elasticity Equals 0$54SupplyQuantity10001.Anincreasein price.2.l
26、eaves the quantity supplied unchanged.PriceFigure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson 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 o
27、f SupplyCopyright2003 Southwestern/Thomson Learning(c)Unit Elastic Supply:Elasticity Equals 1125$51004Quantity0Price2.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:Elastici
28、ty Is Greater Than 1Quantity0Price1.A 22%increasein price.2.leads to a 67%increase in quantity supplied.4100$5200SupplyFigure 6 The Price Elasticity of SupplyCopyright2003 Southwestern/Thomson Learning(e)Perfectly Elastic Supply:Elasticity Equals InfinityQuantity0Price$4Supply3.At a price below$4,qu
29、antity supplied is zero.2.At exactly$4,producers willsupply any quantity.1.At any priceabove$4,quantitysupplied is infinite.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
30、.Books,cars,or manufactured goods are elastic.Time period.Supply is more elastic in the long run.Copyright 2004 South-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 percentag
31、e change in price.Price elasticity of supply=Percentage change in quantity suppliedPercentage change in priceCopyright 2004 South-Western/Thomson LearningTHREE APPLICATIONS OF SUPPLY,DEMAND,AND ELASTICITY Can good news for farming be bad news for farmers?What happens to wheat farmers and the market
32、for wheat when university agronomists discover a new wheat hybrid that is more productive than existing varieties?Copyright 2004 South-Western/Thomson LearningTHREE APPLICATIONS OF SUPPLY,DEMAND,AND ELASTICITY Examine whether the supply or demand curve shifts.Determine the direction of the shift of
33、the curve.Use the supply-and-demand diagram to see how the market equilibrium changes.Figure 8 An Increase in Supply in the Market for WheatCopyright2003 Southwestern/Thomson LearningQuantity ofWheat0Price ofWheat3.and a proportionately smallerincrease in quantity sold.As a result,revenue falls from
34、$300 to$220.DemandS1S22.leadsto a large fallin price.1.When demand is inelastic,an increase in supply.2110$3100Copyright 2004 South-Western/Thomson LearningCompute the Price Elasticity of SupplyED 10011010011023002003002002009504024()/.(.)/.Supply is inelasticCopyright 2004 South-Western/Thomson Lea
35、rningSummary Price elasticity of demand measures how much the quantity demanded responds to changes in the price.Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.If a demand curve is elastic,total revenue falls when the
36、price rises.If it is inelastic,total revenue rises as the price rises.Copyright 2004 South-Western/Thomson LearningSummary The income elasticity of demand measures how much the quantity demanded responds to changes in consumers income.The cross-price elasticity of demand measures how much the quanti
37、ty demanded of one good responds to the price of another good.The price elasticity of supply measures how much the quantity supplied responds to changes in the price.Copyright 2004 South-Western/Thomson LearningSummary In most markets,supply is more elastic in the long run than in the short run.The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price.The tools of supply and demand can be applied in many different types of markets.
