Eco 202.f01.Chap5.Elasticity

7/30/2019 Eco 202.f01.Chap5.Elasticity

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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Elasticity . . .

Demand elasticity is a measure of how

much buyersrespondto changes price,income, and other things.

Supply elasticity is a measure of how

much sellers respond to changes in price

and other things.


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Flavors of elasticity

Price Elasticity of Demand

Income Elasticity of Demand

Advertising Elasticity of Demand

Price Elasticity of Supply


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Price Elasticity of Demand

Price elasticity of demand:

the percent change in quantitydemanded in response to a

percent change in price.


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Price Elasticity of DemandDemand tends to be more elastic :

The larger the number of close

substitutes.

the longer the time period. the more narrowly defined the market.

If the good is a luxury.


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Computing the Price Elasticity

of Demand: A First Approach

priceinchangePercentage

demandedquatityinchangePercentagedemandofelasticityPrice

Example: If the price of an ice cream cone increasesfrom $2.00 to $2.20 and the amount you buy falls from

10 to 8 cones then your price elasticity of demand is:

210

20

10000.2

)00.220.2(

10010

)108(

percent

percent


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of Demand: Mid Point Method

Demand is price elastic

$5

4 Demand

Quantity1000

Price

50

-3percent22-

percent67

5.00)/2(4.00

5.00)-(4.00

50)/2(10050)-(100

ED


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Perfectly Inelastic Demand

Qty demanded doesnt respond to price

Elasticity=0

Quantity

Price

4

$5

Demand

1002. ...leaves the quantity demanded unchanged.

1. Anincreasein price...


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Inelastic DemandA large percent change in price A small

percent change in quantity demandedElasticity < 1

Quantity

Price

4

$51. A 22%increasein price...

Demand

100902. ...leads to a 11% decrease in quantity.


9/40Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Unit Elastic DemandEach 1% increase in price a 1% decrease in

quantity demanded

Elasticity = 1

Quantity

Price

4


Demand


t



ast c emanSmall increase in price big decrease in

quantity demanded

Elasticity > 1

Quantity

Price

4


Demand




Perfectly Elastic DemandThe smallest change in price Huge

change in quantity demanded

Elasticity is INFINITE

Quantity

Price

Demand$4

At exactly $4, consumers will buy any quantityand they wont pay a cent moretheyll buy something else if price rises at all.

Demand facing a competitive firm.



Price Elasticity and Total

RevenueTotal revenue is the price of a good

multiplied by the quantity sold.

TR = P x Q



$4

Demand

Quantity

P

0

Price

P xQ= $400

(total revenue)

100Q

Total Revenue: A Picture



Elasticity and Total Revenue

With inelastic demand, anincrease in price leads to a

smalldecrease in quantitydemanded.

Total revenue increases

when price rises.P x Q Increases when P rises




With elastic demand, a small

increase in price leads to a bigdecrease in quantity demanded.

Total revenue decreaseswhen price rises.

P x Q decreases when P rises



Elasticity and Total Revenue:

Elastic Demand

Demand

Quantity0

Price

$4

50

Demand

Quantity0

Price

Revenue = $100

$5

20

Revenue = $200

An increase in price

from $4 to $5...

leads to a decrease

in total revenue

from$200 to $100



Income Elasticity of Demand

Quantity demanded responds to

consumer income.

Income elasticity of demand:

percentage change in quantity

demanded divided by the percentage

change in income.



Computing Income Elasticity

Income Elasticity

of Demand

Percentage Changein Quantity Demanded

Percentage Changein Income

=



Income Elasticity

- Types of Goods -Necessities are income inelastic

Examples: food, fuel, clothing, utilities,

medical care.

Luxuries areincome elastic.

Examples: sports cars, jewelry,

gourmet foods.



Use the midpoint method to calculate your price elasticity of demand as

the price of compact discs increases from $8 to $10 if (i) your income is

$10,000, and (ii) your income is $12,000.

[(40 32)/36] / [(8-10)/9] = [2/9]/[2/9] = 1

[(50-45)/47.5]/ [(8-10)/9] = 10.5% / 22.2% = .47

Calculate your income elasticity of demand as your income increases

from $10,000 to $12,000 if (i) the price is $12, and (ii) the price is $16.

[(30 24)/27]/[(10-12)/11] = 22.2% / 18.2 % = 1.22

[(12 8)/10 ]/[(10-12)/11] = 40% / 18.2 % = 2.2



Price Elasticity of Supply

Quantity supplied responds to price.

Price elasticity of supply

the percentage change in quantitysupplied resulting from a percent

change in price.




of SupplyThe percentage change in quantity

supplied divided by the percentagechange in price.

Elasticity of Supply =Percentage Change inQuantity Supplied

Percentage Changein Price

Elasticity of Supply =Percentage Change inQuantity Supplied

Percentage Changein Price



Perfectly Inelastic SupplyElasticity equals 0

Quantity

Price

4

$5

Supply

1002. ...leaves the quantity supplied unchanged.




Inelastic SupplyElasticity < 1

Quantity

Price

4


110100

Supply

2. ...leads to a 9 % increase in quantity supplied.



Unit Elastic SupplyElasticity equals 1

Quantity

Price

4


125100

Supply

2. ...leads to a 22% increase in quantity.



Elastic Supply

Elasticity > 1

Quantity

Price

4


200100

Supply




Perfectly Elastic Supply

Elasticity equals infinity

Quantity

Price

Supply$4

At exactly $4,

producers willsupply any quantity.


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Determinants of

Elasticity of SupplyAbility of sellers to change the amount theyproduce

Beach-front land is inelastic. Books, cars, or manufactured goods are elastic.

Time period

Supply is more elastic in the long runthan in the short run.



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An Increase in Supply in the

Market for Wheat

$3

Quantity of Wheat1000

Price ofWheat

Demand

S1



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3. ...and a proportionately smaller

increase in quantity sold. As a result,revenue falls from $300 to $220.

An Increase in Supply in the

Market for Wheat

$3

Quantity of Wheat1000

Price ofWheat 1. When demand is inelastic,

an increase in supply...

Demand

S1 S2

2

110

2. ...leadsto a largefall inprice...


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Summary

The price elasticity of supply measures

how much the quantity supplied

responds to changes in the price.

In most markets, supply is more elastic

in the long run than in the short run.


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GraphicalReview


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of Demand

Demand is price elastic

$54 Demand

Quantity1000

Price

50

-3percent22-

percent67

5.00)/2(4.005.00)-(4.00

50)/2(10050)-(100

ED


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Elasticity and Total Revenue:

Inelastic Demand Qddoesnt

change much when price rises

$3

Quantity0

Price

80

Revenue = $240

Demand$1 Demand

Quantity0

Revenue = $100

100

Price


from $1 to $3...

leads to an increase

in total revenue

from$100 to $240


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Elastic Demand Qd changes

a lot when price rises

Demand

Quantity0

Price

$4

50

Demand

Quantity0

Price

Revenue = $100

$5

20

Revenue = $200


from $4 to $5...

leads to a decrease

in total revenue

from$200 to $100


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Perfectly Inelastic Supply- Elasticity equals 0

Quantity

Price

4

$5

Supply

1002. ...leaves the quantity supplied unchanged.



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Inelastic Supply

- Elasticity is less than 1

Quantity

Price

4


110100

Supply



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Unit Elastic Supply

- Elasticity equals 1

Quantity

Price

4


125100

Supply



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Elastic Supply

- Elasticity is greater than 1

Quantity

Price

4


200100

Supply


Eco 202.f01.Chap5.Elasticity

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