7 - 1 copyright mcgraw-hill/irwin, 2005 price elasticity of demand price elasticity and total...

7 - 1Copyright McGraw-Hill/Irwin, 2005

Price Elasticity of Demand

Price Elasticity and Total Revenue

Determinants of Price Elasticity of Demand

Price Elasticity of Supply

Cross Elasticity of Demand

Income Elasticity of Demand

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Elasticity of

Demand & Supply

7C H A P T E R








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HOW MUCH MORE OR LESS?

DOES IT MATTER?to whom?

Think About It...THE LAW OF DEMAND SAYS...

PRICE ELASTICITY OF DEMAND

Consumers will buy more when prices go down and less when prices go up

Price Elasticity Provides an Answer








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The percentage change in price

The percentage change in quantity

.01

.02

Elasticity is .5Q

P

P1

P2

Q1Q2

D

Measures Responsiveness to Price Changes









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The percentage change in price

The percentage change in quantity

Q

P

P1

P2

Q1Q2

D

Commonly Expressed as…


% P% Q d

Elasticity is .5








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The Price-Elasticity Coefficient and Formula


Ed =

Percentage change in quantitydemanded of product X

Percentage change in priceof product X

Or equivalently…

Ed =Percentage change in quantity demanded of X

Original quantity demanded of X

Change in price of X Original price of X

Elimination of the Minus Sign








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Interpretations of Ed


Elastic Demand

Ed =.04.02

= 2

Inelastic Demand

Ed =.01.02

= .5

Unit Elasticity

Ed =.02.02

= 1








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Extreme CasesPRICE ELASTICITY OF DEMAND

Perfectly Inelastic Demand

Perfectly Elastic DemandP

0

P

0

D1

Ed = 0

D2

Ed =

Q

Q








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Refinement – The Midpoint Formula


Ed =

Change inquantity

Sum ofQuantities/2

Change inprice

Sum ofprices/2








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Q

P

D

When prices are low,

TR

Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE

So is total revenue








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Q

P

D

Total revenue riseswith price to a

point... TR

Quantity Demanded









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Q

P

D


point...

then declines

TR

Quantity Demanded









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Q

P

D


point...

then declines

TR

Quantity Demanded


Total Revenue Test








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Q

P

D


point...

then declines

InelasticDemand

InelasticDemand

TR

Quantity Demanded









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Q

P

D


point...

then declines

ElasticDemand

ElasticDemand

InelasticDemand

TR

Quantity Demanded


InelasticDemand








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Q

P

D


point...

then declines

ElasticDemand

ElasticDemand

InelasticDemand

TR

Quantity Demanded


InelasticDemand

UnitElastic








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Inelastic from 0 to 1Typical of necessities one must have

Typical of luxuries one wants

Elastic from 1 to

Unit elastic when exactly = 1Price change does not reduce total revenue

Price Elasticity is...PRICE ELASTICITY & TOTAL REVENUE








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DETERMINANTS OF PRICEELASTICITY OF DEMAND

•Substitutability•Proportion of Income•Luxuries versus Necessities•TimeApplications...Large Crop YieldsExcise TaxesDecriminalization of Illegal DrugsMinimum Wage








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Now, compare the immediatemarket period, the short-run,

and long run.

PRICE ELASTICITY OF SUPPLY

Es=

Percentage change in quantitysupplied of good X

Percentage change in the price of good X








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Po

P

Q

D1

Qo

An increase indemand withoutenough time tochange supplycauses…

Sm

Immediate Market periodPRICE ELASTICITY OF SUPPLY








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Po

Pm

P

Q

D1

Qo

D2

An increase indemand withoutenough time tochange supplycauses… anincrease in price

Sm

Immediate Market periodPRICE ELASTICITY OF SUPPLY








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Po

P

Q

D1

Qo

Short RunPRICE ELASTICITY OF SUPPLY

An increase indemand withless intensitysupply usecauses...

Ss








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Po

P

Q

D1

Qo

D2

Short RunPRICE ELASTICITY OF SUPPLY

Ps

An increase indemand withless intensitysupply usecauses...a lowerincrease in price

Ss

Qs








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Po

P

Q

D1

Qo

Long RunPRICE ELASTICITY OF SUPPLY

An increase indemand in thelong run allowsgreater changecausing...

SL








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Po

P

Q

D1

Qo

D2

Long RunPRICE ELASTICITY OF SUPPLY

PL

An increase indemand in thelong run allowsgreater changecausing...

SL

QL

Even more elasticresponse - lessprice increase








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Applications of Price Elasticity of Supply

Antiques and ReproductionsVolatile Gold Prices

PRICE ELASTICITY OF SUPPLY








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CROSS ELASTICITY OF DEMAND

Exy =

Percentage change in quantitydemanded of good X

Percentage change in the price of good y

Positive Sign Goods are SubstitutesNegative Sign Goods are ComplementaryZero or Near-Zero Value Goods are Independent








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INCOME ELASTICITY OF DEMAND

Ei =

Percentage change in quantitydemanded

Percentage change in income

Positive Sign Goods are Normal or Superior

Negative SignGoods are Inferior

price elasticity of demandelastic demandinelastic demandunit elasticityperfectly inelastic demandperfectly elastic demandtotal revenue (TR)

total-revenue testprice elasticity of supplymarket periodshort runlong runcross elasticity of demandincome elasticity of demand

ENDBACKCopyright McGraw-Hill/Irwin, 2005








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Next: Chapter 8

Consumer Behaviorand

Utility Maximization

7 - 1 copyright mcgraw-hill/irwin, 2005 price elasticity of demand price elasticity and total...

Documents

elasticity of demand

priceelasticity coefficient

q d elasticity

law of demand

unit elasticity e d

price sum of prices2

price of product x

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