101 lecture 5 elasticity
DESCRIPTION
ElasticityTRANSCRIPT
Microeconomics Chapter 5
!
Elasticity
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Movement along the Demand Curve
Price changes !
demand curve does not change
!quantity demanded
changes
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shift in the Demand CurvePrice does not
change !
demand curve shifts !
quantity demanded changes
Movement or Shift?
Variable Change Movement Shift
Price
Income
Related Goods
Tastes
Population and Demographics
Expectations
elasticity price elasticity of demand total revenue total expenditure income elasticity of demand cross-price elasticity of demand price elasticity of supply
Key Terms
ELASTICITY EQUATION BENCHMARK
Price Demand
Cross- Price
Income
Price Supply
MPF
Inelastic | Elastic 1
Compliments | Substitutes 0
Inferior | Normal | Luxury 0 1
Inelastic | Elastic 1
%∆QD
%∆QD1
%∆P
%∆P2
%∆QD%∆I
%∆QS%∆P
∆Q∆PQPx
Elasticity If I change one thing does another thing also change?
Elasticity A measure of how much one economic variable
responds to changes in
another economic variable
Price Elasticity of Demand
%%
QD
P
Percentage Change in Quantity Demanded
Percentage Change in Price
Price Quantity Total Revenue
90 1 90
80 2 160
70 3 210
60 4 240
50 5 250
40 6 240
30 7 210
20 8 160
10 9 90
Demand Schedule
Total Revenue Curve
0
52
104
156
208
260
10 20 30 40 50 60 70 80 90
Total Revenue
Price Per Pizza
Percentage Change
%
New - OldOld
Ignore units in the scale
Price Elasticity of Demand
1
ElasticInelastic
<1 >1
1. Calculate Elasticity 2. Take Absolute Value 3. Compare to benchmark of 1
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Gasoline
Price
%rQD %rP
(4-5)÷5
(6-3)÷3
-.21
.2
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price
%rQD %rP
(3-5)÷5
(4-3)÷3
-.4.33
1.2
Price Increase
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price
%rQD %rP
(5-3)÷3
(3-4)÷4
.66-.25
2.67
Price Decrease
!
Midpoint Formula
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price
%rQD %rP
(3-5)÷5
(4-3)÷3
-.4.33
1.2
Price Increase
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price
%rQD %rP
(5-3)÷3
(3-4)÷4
+66%-25%
2.67
Price Decrease
Midpoint Formula
Delta Q over
Q Bar
Delta P over P Bar
Q
QPP
Trick: Flip denominator and multiply
X =
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price7
4
1.75
Midpoint Formula
rQ Q rP
P x
24 1
3.5x
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Gasoline
Price
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
3 4.5 6
Gallons - Gasoline
Price
Scales can be deceptive
!
What determines Price Elasticity of
Demand?
Close Substitutes Passage of Time
Luxuries vs. Necessities Definition of Market
Share of Budget
Close Substitutes
Elastic >1
Inelastic <1
Passage of Time
More Time More Elastic
Luxuries vs. Necessities
Elastic Inelastic
Definition of Market
Elastic Inelastic
Demand for Gasoline in General
Demand for Gasoline in Rexburg
Share of the Budget
ElasticInelastic
Small Large
!
Price Elasticity and
Total Revenue
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Gasoline
Price$6.00 x 4 = $24
$3.00 x 5 = $15
Inelastic (<1) Raising prices will increase total revenue
Net Gain = $9
Lose
Gain
Total RevenueTR = P x Q
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price$4.00 x 3 = $12
$3.00 x 5 = $15
Elastic (>1) Raising prices will decrease total revenue
Net Gain = -$3
Lose
Gain
Total RevenueTR = P x Q
!
Cross-Price Elasticity of Demand
Cross-Price Elasticity of Demand
Percentage Change in Quantity Demanded of one good
Percentage Change in Price of another good
%%
QD
P1
2
Cross-Price Elasticity of Demand
0
SubstitutesCompliments
<0 >0
1. Calculate Elasticity 2. Compare to benchmark of 0
%%
QD1
P2
35%
50%=.7 >0
Substitutes
%%
QD1
P2
-40%
50%=-.8 <0
Compliments
Cross-Price Elasticity of Demand
0
SubstitutesCompliments
<0 >0
%%
QD
P1
2
!
Income Elasticity of Demand
!
Normal, Inferior, or Luxury?
Percentage Change in Quantity Demanded
Percentage Change in Income
Income Elasticity of Demand
%%
QD
I
Income Elasticity of Demand
0
LuxuryInferior
<0 >1
1. Calculate Elasticity 2. Compare to benchmark of 0 and 1
1
Normal
%%
QD
I
10%
20%=.5
>0 <1
Normal
%%
QD
I
-50%
20%=-2.5 <0
Inferior
%%
QD
I
100%
20%= 5 >1
Luxury
Income Elasticity of Demand
0
LuxuryInferior
<0 >11
Normal
%%
QD
I
!
Price Elasticity of Supply
!
Price Elasticity of Supply
%%
QS
P
Percentage Change in Quantity Supplied
Percentage Change in Price
Price Elasticity of Supply
1
ElasticInelastic
<1 >1
1. Calculate Elasticity 2. Compare to benchmark of 1
%%
QS
P
10%
20%=.5 <1
Inelastic
%%
QS
P
40%
20%= 2 >1
Elastic
Price Elasticity of Supply
1
ElasticInelastic
<1 >1
%%
QS
P
!
What determines Price Elasticity of
Demand?
Close Substitutes Passage of Time
Luxuries vs. Necessities Definition of Market
Share of Budget
Cross-Price Elasticity of Demand
0
SubstitutesCompliments
<0 >0
1. Calculate Elasticity !
!
2. Compare to benchmark of 0
%∆QD1
%∆P2
Income Elasticity of Demand
0
LuxuryInferior
<0 >1
1. Calculate Elasticity !
!
2. Compare to benchmark of 0 and 1
1
Normal
%∆QD%∆I
ELASTICITY EQUATION BENCHMARK
Price Elasticity of Demand
Cross-Price Elasticity
Income Elasticity
Price Elasticity of Supply
Midpoint Formula
Inelastic | Elastic 1
Compliments | Substitutes 0
Inferior | Normal | Luxury 0 1
Inelastic | Elastic 1
%∆QD%∆P
%∆QS%∆P
%∆QD1
%∆P2
%∆QD%∆I
∆Q∆PQPx
1. Prices increase from $5.00 to $6.00. Quantity demanded decreases from 100 units to 80 units.!!What is the price elasticity of demand?!What is the total revenue at $5.00 per unit?!What is the total revenue at $6.00 per unit?!!2. If I increase prices from $20 to $25, quantity demanded decreases from 1,000 units to 900 units. Should I raise prices? Why?!!3. Prices increase from $10 to $15 for product A. Quantity demanded for product B increases from 500 units to 600 units!!What is the cross-price elasticity of demand? Are these products compliments or substitutes?!!
4. Prices increase from $10 to $15 for product C. Quantity demanded for product B decreases from 40 units to 30 units!!What is the cross-price elasticity of demand? Are these products compliments or substitutes?!!5. Your income increase from $10 to $15 per hour. Quantity demanded for product E decreases from 20 units to 15 units!!What is the income elasticity of demand? Is this product an inferior, normal, or luxury good?!!6. Your income decreases from $12 to $10 per hour. Quantity demanded for product F increases from 10 units to 12 units!!What is the income elasticity of demand? Is this product an inferior, normal, or luxury good?!
Elasticity Quiz
1. Prices increase from $5.00 to $6.00. Quantity demanded decreases from 100 units to 80 units.!!What is the price elasticity of demand?!Midpoint Formula !!!!What is the total revenue at $5.00 per unit?!!$5 x 100 = $500!!What is the total revenue at $6.00 per unit?!!$6 x 80 = $480
∆Q∆PQPx 20
1905.50x 1.22110
90= = =