4.elasticity approach. nccu 2006 elas 2 薄利多銷 ? total expenditure (total sales) = p × q...
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4.Elasticity approach
NCCU 2006 Elas 2
薄利多銷 ?
Total expenditure (Total sales) = P × Q Total Cost = direct cost + indirect cost Profit = Total sales - Total Cost 薄利 implies lowering price 多銷 means more sales
NCCU 2006 Elas 3
嚴刑重罰 Or 寓禁於徵 ?
What do you think?Could reducing the supply of illegal drugs
cause an increase in drug-related burglaries?
NCCU 2006 Elas 4
The Effect of Extra CustomPatrols on the Market for Illicit Drugs
Q(1,000s of ounces/day)
P($
/ou
nce
)
50
50
S
D
80
40
S’
Total Expenditure = P x QS $250 = $50 x 50S’ $320 = $80 x 40
NCCU 2006 Elas 5
Using Price Elasticity of Demand: The War on Drugs
Every year U.S. Government spends about $20 billion on efforts to restrict the supply of drugs
Figure (a) Market for heroin without government intervention
Figure (b) Result of government efforts to restrict supply
(current policy) Figure (c)
Results of an effective policy of reducing demand
NCCU 2006 Elas 6
3 conditions in the War on Drugs
Quantity
Price per Unit
P1
Q1
D1
A A
S1
Quantity
Price per Unit
Q1
D1
S1
Quantity
Price per Unit
P1
Q1
S1
D1
(a) (b) (c)
AP1
Q3
P3
D2
C
Q2
B
S2
P2
NCCU 2006 Elas 7
Price Elasticity of Demand
ElasticityA measure of the extent to which quantity
demanded and quantity supplied respond to variations in price, income, and other factors.
中文定義 : 對價格之敏感度
NCCU 2006 Elas 8
Price Elasticity of Demand
DefinedGenerally
A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good
Formally The percentage change in the quantity
demanded that results from a 1 percent change in its price
NCCU 2006 Elas 9
Price Elasticity of Demand
Measuring Price Elasticity of Demand
Price in Change Percentage
DemandedQuantity in Change Percentage
NCCU 2006 Elas 10
Assume The price of pork falls by 2% and the
quantity demanded increases by 6%Then the price elasticity of demand for pork is
Price Elasticity of Demand
32
6
NCCU 2006 Elas 11
Price Elasticity of Demand
Measuring Price Elasticity of Demand
Observations Price elasticity of demand will always be
negative (i.e., an inverse relationship between price and quantity)
For convenience we drop the negative sign
Price in Change Percentage
DemandedQuantity in Change Percentage
NCCU 2006 Elas 12
Price Elasticity of Demand
Measuring Price Elasticity of Demand
When is
> 1: elastic
< 1: inelastic
= 1: unit elastic
Price in Change Percentage
DemandedQuantity in Change Percentage
NCCU 2006 Elas 13
Elastic and Inelastic Demand
3
Price elasticityof demand
Inelastic
Unit elastic
Elastic
210
NCCU 2006 Elas 14
Price Elasticity of Demand
What is the elasticity of demand for pizza?Originally
Price = $1/slice Quantity demanded = 400 slices/day
New Price = $0.97/sliceQuantity demanded = 404 slices/day, then
Inelastic :3
1
Price in Change %
Quantity in Change %
NCCU 2006 Elas 15
Price Elasticity of Demand
What is the elasticity of season ski passes?Originally
Price = $400Quantity demanded = 10,000 passes/year
New Price = $380Quantity demanded = 12,000 passes/year, then
Elastic :5
20
Price in Change %
Quantity in Change %
NCCU 2006 Elas 16
Determinants of Price Elasticity of Demand
1. Substitution Possibilities
2. Budget Share
3. Time
NCCU 2006 Elas 17
Price Elasticity (in US) Estimates for Selected Products
Good or service Price elasticityGreen peas 2.80
Restaurant meals 1.63
Automobiles 1.35
Electricity / gasoline? 1.20
Beer 1.19
Movies 0.87
Air travel (foreign) 0.77
Shoes 0.70
Coffee 0.25
Theater, opera 0.18
WHY?
NCCU 2006 Elas 18
Question?
Why is the price elasticity of demand more than 14 times larger for
green peas
than for
theater and opera
performances?
NCCU 2006 Elas 19
Discussion
Economic NaturalistWill higher taxes on cigarettes curb
teenage smoking?Why was the luxury tax on yachts such a
disaster?
NCCU 2006 Elas 20
A Graphical Interpretationof Price Elasticity
For small changes in price
PΔP
QΔQ elasticity Price
Where Q is the original quantity and P is the original price
NCCU 2006 Elas 21
A Graphical Interpretationof Price Elasticity
ExampleOriginally
Price (P) = $100Quantity (Q) = 20
New Price (P) = $105Quantity (Q) = 15
Elastic:55
25
1005
205
NCCU 2006 Elas 22
A Graphical Interpretation of Price Elasticity of Demand
Quantity
Pri
ce
P
D
A
Q
P - P
Q + Q
Q
P
slopeQ
P A
1 at elasticity icePr
NCCU 2006 Elas 23
Calculating Price Elasticity of Demand
20
Quantity
Pri
ce
1
D
A
2 3 4 5
16
12
8
4
45
20
intercept horizontal
intercept verticalslope
3
2
12
8
4
1x
3
8A
NCCU 2006 Elas 24
Calculating Price Elasticity of Demand
20
Quantity
Pri
ce
1 2 3 4 5
16
12
8
4
D
A
QuestionWhat is the price elasticityof demand when P = $4?
NCCU 2006 Elas 25
D1
D2
12
4 6 12
6
4
Price Elasticity and the Steepness of the Demand Curve
Quantity
Pri
ceWhat is the price elasticity ofdemand when P = $4?
2
1
612
1
4
41D
2
126
1
4
42D
NCCU 2006 Elas 26
12
D1
D2
4 6 10 12
6
4
1
For D2 when P = $1
Price Elasticity and the Steepness of the Demand Curve
Quantity
Pri
ce
5
1
126
1
10
12D
NCCU 2006 Elas 27
Price Elasticity and the Steepness of the Demand Curve
12
Quantity
Pri
ce
D1
D2
4 6 10 12
6
4
1
ObservationIf two demand curves have a point in common, the steeper curve must be less elastic with respect to price at that point
NCCU 2006 Elas 28
Price Elasticity Regions along a Straight-Line Demand Curve
Quantity
Pri
ce
b/2
a/2
a
b
1
1
1
ObservationPrice elasticity varies at every point along a straight-line demand curve
NCCU 2006 Elas 29
Perfectly Elastic Demand Curve
Quantity
Pri
ce
) y (elasticit demand
elastic Perfectly
NCCU 2006 Elas 30
Perfectly Inelastic Demand Curve
Quantity
Pri
ce
)0 y (elasticit demand
inelasticPerfectly
NCCU 2006 Elas 31
4
4
6
A
B3
P
Q
1 then 6 and 3 If Q P
2 then 4 and 4 If Q P6
12
What is the price elasticity of demand?
Two Points on a Demand Curve
Quantity
Pri
ce
0
NCCU 2006 Elas 32
A Graphical Interpretationof Price Elasticity
The Midpoint Formula
2PPP
2QQQ
BA
BA
/
/
BA
BA
PPP
QQQ
and
NCCU 2006 Elas 33
Two Points on a Demand Curve
Then the price elasticity ofdemand between A and B:
Quantity
Pri
ce
40
6
12
4
6
A
B3
P
Q
41
341/
642/ .
NCCU 2006 Elas 34
Elasticity and Total Expenditure
Total Expenditure = P x QMarket demand measures the quantity (Q)
at each price (P) Total Expenditure = Total Revenue
NCCU 2006 Elas 35
D
A
Total Expenditure = $1,000/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pri
ce (
$/ti
cket
)
1 3 4 5 6
10
8
6
4
2
0 2
NCCU 2006 Elas 36
D
B
Total Expenditure = $1,600/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pri
ce (
$/ti
cket
)
1 3 4 5 6
10
8
6
4
2
0 2
NCCU 2006 Elas 37
Elasticity and Total Expenditure
What do you think?Will increasing the market price always
increase total revenue?
NCCU 2006 Elas 38
Again,薄利多銷 ?
NCCU 2006 Elas 39
DTotal Expenditure = $1,600/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pri
ce (
$/ti
cket
)
1 3 4 5 6
10
8
6
4
2
0 2
NCCU 2006 Elas 40
D
Total Expenditure = $1,000/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pri
ce (
$/ti
cket
)
1 3 4 5 6
10
8
6
4
2
0 2
NCCU 2006 Elas 41
Elasticity and Total Expenditure
General RuleA price increase will increase total revenue
when the % change in P is greater than the % change in Q.
NCCU 2006 Elas 42
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pri
ce (
$/ti
cket
)
1 3 4 5 6
10
8
6
4
2
0 2
NCCU 2006 Elas 43
Total Expenditure as a Function of Price
Price ($/ticket) Total expenditure ($/day)
12 0
10 1,000
8 1,600
6 1,800
4 1,600
2 1,000
0 0
NCCU 2006 Elas 44
Total Expenditure as a Function of Price
1,800
Price ($/ticket)
To
tal
ex
pe
nd
itu
re (
$/d
ay
)
2 6 8 10 12
1,600
1,000
0 4
12
Quantity (100s of tickets/day)
Pri
ce
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
Total revenue is at a maximum at themidpoint on a straight-line demand curve
NCCU 2006 Elas 45
Elasticity and Total Expenditure
What do you think?Should a rock band raise or lower its price
to increase total revenue? Assume
3
0005Q
20P
,
$
NCCU 2006 Elas 46
Elasticity and Total Expenditure
What do you think?Should a rock band raise or lower its price to
increase total revenue? Then
Total revenue = $20 x 5,000 = $100,000/week
If P is increased 10%, Q will decrease 30%Total revenue = $22 x 3,500 = $77,000/week
If P is lowered 10%, Q will increase 30%Total revenue = $18 x 6,500 = $177,000/week
NCCU 2006 Elas 47
Elasticity and Total Expenditure
RuleWhen price elasticity is greater than 1,
changes in price and changes in total expenditures always move in opposite directions.
When price elasticity is less than 1, changes in price and changes in total expenditures always move in the same direction.
NCCU 2006 Elas 48
Elasticity and Total Expenditure
Cross-Price Elasticity of DemandThe percentage by which quantity demanded
of the first good changes in response to a 1 percent change in the price of the second good
NCCU 2006 Elas 49
Elasticity and Total Expenditure
Cross-Price Elasticity of DemandSubstitute Goods
When the cross-price elasticity of demand is positive
Complement GoodsWhen the cross-price elasticity of demand is
negative
NCCU 2006 Elas 50
Elasticity and Total Expenditure
Income Elasticity of DemandThe percentage by which quantity
demanded changes in response to a 1 percent change in income
NCCU 2006 Elas 51
Elasticity and Total Expenditure
Income Elasticity of DemandNormal Goods
Income elasticity is positive
Inferior GoodsIncome elasticity is negative
NCCU 2006 Elas 52
The Price Elasticity of Supply
Price Elasticity of SupplyThe percentage change in the quantity
supplied that occurs in response to a 1 percent change in price
PP
QQ supply of elasticity Price
slope
1
Q
P supply of elasticity Price
NCCU 2006 Elas 53
15
5B
P
Q
1515155 B
S
12
4A
1412124 A
Calculating the Price Elasticity of Supply Graphically
Quantity
Pri
ce
0
NCCU 2006 Elas 54
2
4
2
A
2224 A
3
5B
3
5135 B
A Supply Curve for Which Price Elasticity Declines as Quantity Rises
Quantity
Pri
ce
0
S
NCCU 2006 Elas 55
A Perfectly Inelastic Supply Curve
Quantity of land in Manhattan
(1,000s of acres)
Pri
ce (
$/ac
re)
0
S
Elasticity = 0 at everypoint along a verticalsupply curve
What is the price elasticity of supply of land within the borough limits of Manhattan?
NCCU 2006 Elas 56
Quantity of lemonade
(cups/day)
Pri
ce (
cen
ts/c
up
)
0
14 S
If MC is constant, then theprice elasticity of supply at every pointalong a horizontal supply curve is infinite
What is the price elasticity of supply of lemonade?
A Perfectly Elastic Supply Curve
NCCU 2006 Elas 57
Determinants of Supply ElasticityFlexibility of inputsMobility of inputsAbility to produce substitute inputsTime
The Price Elasticity of Supply
NCCU 2006 Elas 58
Economic NaturalistWhy are gasoline prices so much more
volatile than car prices?Differences in markets
o Demand for gasoline is more inelastico Gasoline market has larger and more frequent
supply shifts
The Price Elasticity of Supply
NCCU 2006 Elas 59
Greater Volatility in Gasoline Prices than in Car Prices
Quantity(millions of gallons/day)
Pri
ce (
$/g
allo
n)
0 6
1.69
S’
D
1.02
7.2
S
Gasoline
NCCU 2006 Elas 60
Greater Volatility in Gasoline Prices than in Car Prices
Pri
ce (
$1,0
00s/
car)
D
17
S’
11Quantity
(1,000s of cars/day)Cars
16.4
12
S
Cars
NCCU 2006 Elas 61
How would elasticity of supply and fluctuating demand impact price volatility?
What do you think?
NCCU 2006 Elas 62
Unique and Essential Inputs: The Ultimate Supply BottleneckWhy does Shaquille O’Neal get paid over
$120 million over a seven-year contract?
The Price Elasticity of Supply
4.Elasticity approach
EndEnd
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