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 32887-6777.1Harcourt,Inc.items and deri
2、ved items copyright 2001 by Harcourt,Inc.Elasticity.n is a measure of how much buyers and sellers respond to changes in market conditions n allows us to analyze supply and demand with greater precision.2Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Price Elasticity of DemandnPr
3、ice elasticity of demand is the percentage change in quantity demanded given a percent change in the price.nIt is a measure of how much the quantity demanded of a good responds to a change in the price of that good.3Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Determinants of
4、Price Elasticity of DemandnNecessities versus LuxuriesnAvailability of Close SubstitutesnDefinition of the MarketnTime Horizon4Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Determinants of Price Elasticity of DemandDemand tends to be more elastic:nif the good is a luxury.nthe l
5、onger the time period.nthe larger the number of close substitutes.nthe more narrowly defined the market.5Harcourt,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 dem
6、anded 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 Price6Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Compu
7、ting the 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:2percen
8、t10percent2010000200220210010810.).()(7Harcourt,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
9、 of the direction of the change.)/2P)/(PP(P)/2Q)/(QQ(Q=Demand of Elasticity Price121212128Harcourt,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 fro
10、m 10 to 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 Price121212129Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Ranges of ElasticityI
11、nelastic Demandn Quantity demanded does not respond strongly to price changes.n Price elasticity of demand is less than one.Elastic Demandn Quantity demanded responds strongly to changes in price.n Price elasticity of demand is greater than one.10Harcourt,Inc.items and derived items copyright 2001 b
12、y Harcourt,Inc.Computing the Price Elasticity of DemandDemand is price elastic$54DemandQuantity1000Price50-3percent 22-percent 67 5.00)/2(4.005.00)-(4.0050)/2(10050)-(100ED11Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Ranges of ElasticitynPerfectly InelasticQuantity demanded
13、does not respond to price changes.nPerfectly ElasticQuantity demanded changes infinitely with any change in price.nUnit ElasticQuantity demanded changes by the same percentage as the price.12Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.A Variety of Demand CurvesBecause the pri
14、ce elasticity of demand measures how much quantity demanded responds to the price,it is closely related to the slope of the demand curve.13Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Inelastic Demand-Elasticity equals 0QuantityPrice4$5Demand1002.leaves the quantity
15、demanded unchanged.1.Anincreasein price.14Harcourt,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.15Harcourt,Inc.items and derived items copyright 2001 by Har
16、court,Inc.Unit Elastic Demand-Elasticity equals 1QuantityPrice4$51.A 22%increasein price.Demand100802.leads to a 22%decrease in quantity.16Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elastic Demand-Elasticity is greater than 1QuantityPrice4$51.A 22%increasein price.Demand1005
17、02.leads to a 67%decrease in quantity.17Harcourt,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,quanti
18、ty demanded is infinite.18Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total RevenuenTotal revenue is the amount paid by buyers and received by sellers of a good.nComputed as the price of the good times the quantity sold.TR=P x Q19Harcourt,Inc.items and derived
19、items copyright 2001 by Harcourt,Inc.$4DemandQuantityP0PriceP x Q=$400(total revenue)100QElasticity and Total Revenue20Harcourt,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 t
20、hat is proportionately smaller.Thus,total revenue increases.21Harcourt,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 incre
21、ase in total revenue from$100 to$24022Harcourt,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.23Harcourt,
22、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$10024Harcourt,Inc.items and derived items c
23、opyright 2001 by Harcourt,Inc.Computing the Elasticity of a Linear Demand CurvePriceQuantityTotal Revenue(Price xQuantity)Percent Change in PricePercent Changein QuantityElasticityDescription$014$0200%15%0.1Inelastic1121267180.3Inelastic2102040220.6Inelastic382429291Unit elastic462422401.8elastic542
24、018673.7elastic62121520013elastic700 25Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Income Elasticity of DemandnIncome elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers income.nIt is computed as the percentage change in th
25、e quantity demanded divided by the percentage change in income.26Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing Income ElasticityIncome Elasticityof DemandPercentage Change in Quantity DemandedPercentage Change in Income=27Harcourt,Inc.items and derived items copyright
26、 2001 by Harcourt,Inc.Income Elasticity-Types of Goods-nNormal GoodsnInferior GoodsnHigher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.28Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Income Elasticity-Types of Goods-n
27、Goods consumers regard as necessities tend to be income inelasticExamples include food,fuel,clothing,utilities,and medical services.nGoods consumers regard as luxuries tend to be income elastic.Examples include sports cars,furs,and expensive foods.29Harcourt,Inc.items and derived items copyright 200
28、1 by Harcourt,Inc.Price Elasticity of SupplynPrice elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.nIt is a measure of how much the quantity supplied of a good responds to a change in the price of that good.30Harcourt,Inc.items and derived
29、items copyright 2001 by Harcourt,Inc.Ranges of ElasticitynPerfectly ElasticES=nRelatively ElasticES 1nUnit ElasticES=131Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Ranges of ElasticitynRelatively InelasticES 1nPerfectly InelasticES=0 32Harcourt,Inc.items and derived items cop
30、yright 2001 by Harcourt,Inc.Perfectly Inelastic Supply-Elasticity equals 0QuantityPrice4$5Supply1002.leaves the quantity supplied unchanged.1.Anincreasein price.33Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Inelastic Supply-Elasticity is less than 1QuantityPrice4$51.A 22%incr
31、easein price.110100Supply2.leads to a 10%increase in quantity.34Harcourt,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.35Harcourt,Inc.items and derived items c
32、opyright 2001 by Harcourt,Inc.Elastic Supply-Elasticity is greater than 1QuantityPrice4$51.A 22%increasein price.200100Supply2.leads to a 67%increase in quantity.36Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Elastic Supply-Elasticity equals infinityQuantityPriceSupp
33、ly$41.At any priceabove$4,quantitysupplied is infinite.2.At exactly$4,producers willsupply any quantity.3.At a price below$4,quantity supplied is zero.37Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Determinants of Elasticity of SupplynAbility of sellers to change the amount of
34、 the good they produce.Beach-front land is inelastic.Books,cars,or manufactured goods are elastic.nTime period.Supply is more elastic in the long run.38Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the Price Elasticity of SupplyThe price elasticity of supply is comput
35、ed as the percentage change in the quantity supplied divided by the percentage change in price.Elasticity of Supply=Percentage Change in Quantity SuppliedPercentage Change in PriceElasticity of Supply=Percentage Change in Quantity SuppliedPercentage Change in Price39Harcourt,Inc.items and derived it
36、ems copyright 2001 by Harcourt,Inc.Application of ElasticitynCan good news for farming be bad news for farmers?nWhat happens to wheat farmers and the market for wheat when university agronomists discover a new wheat hybridthat is more productive than existing varieties?40Harcourt,Inc.items and deriv
37、ed items copyright 2001 by Harcourt,Inc.Application of ElasticitynExamine whether the supply or demand curve shifts.nDetermine the direction of the shift of the curve.nUse the supply-and-demand diagram to see how the market equilibrium changes.41An Increase in Supply in the Market for Wheat$3Quantit
38、y of Wheat1000Price ofWheatDemandS1Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.423.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 i
39、s inelastic,an increase in supply.DemandS1S221102.leadsto a large fall in price.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.43Harcourt,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=ED44Harcour
40、t,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=EDDemand is inelastic45Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.SummarynPrice elasticity of demand measures how much the quantity demanded re
41、sponds to changes in the price.nIf a demand curve is elastic,total revenue falls when the price rises.nIf it is inelastic,total revenue rises as the price rises.46Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.SummarynThe price elasticity of supply measures how much the quantity
42、 supplied responds to changes in the price.nIn most markets,supply is more elastic in the long run than in the short run.47Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Graphical Review48Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Computing the Price Ela
43、sticity of DemandDemand is price elastic$54DemandQuantity1000Price50-3percent 22-percent 67 5.00)/2(4.005.00)-(4.0050)/2(10050)-(100ED49Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Inelastic Demand-Elasticity equals 0QuantityPrice4$5Demand1002.leaves the quantity dem
44、anded unchanged.1.Anincreasein price.50Harcourt,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.51Harcourt,Inc.items and derived items copyright 2001 by Harcou
45、rt,Inc.Unit Elastic Demand-Elasticity equals 1QuantityPrice4$51.A 22%increasein price.Demand100802.leads to a 22%decrease in quantity.52Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elastic Demand-Elasticity is greater than 1QuantityPrice4$51.A 22%increasein price.Demand100502.
46、leads to a 67%decrease in quantity.53Harcourt,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
47、demanded is infinite.54Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.$4DemandQuantityP0Price 100QElasticity and Total Revenue55Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total Revenue:Inelastic Demand$3Quantity0Price80Revenue=$240 Demand$
48、1DemandQuantity0Revenue=$100100 PriceAn increase in price from$1 to$3.leads to an increase in total revenue from$100 to$24056Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Elasticity and Total Revenue:Elastic DemandDemandQuantity0Price$450DemandQuantity0PriceRevenue=$100$520Reve
49、nue=$200 An increase in price from$4 to$5.leads to a decrease in total revenue from$200 to$10057Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Perfectly Inelastic Supply-Elasticity equals 0QuantityPrice4$5Supply1002.leaves the quantity supplied unchanged.1.Anincreasein price.58H
50、arcourt,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.59Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Unit Elastic Supply-Elasticity e
