7 - 1 copyright mcgraw-hill/irwin, 2005 price elasticity of demand price elasticity and total...
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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
Key Terms
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NextSlide
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Elasticity of
Demand & Supply
7C H A P T E R
7 - 2Copyright 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
Key Terms
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NextSlide
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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
7 - 3Copyright 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
Key Terms
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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
PRICE ELASTICITY OF DEMAND
7 - 4Copyright 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
Key Terms
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NextSlide
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The percentage change in price
The percentage change in quantity
Q
P
P1
P2
Q1Q2
D
Commonly Expressed as…
PRICE ELASTICITY OF DEMAND
% P% Q d
Elasticity is .5
7 - 5Copyright 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
Key Terms
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NextSlide
EndEndShowShow
The Price-Elasticity Coefficient and Formula
PRICE ELASTICITY OF DEMAND
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
7 - 6Copyright 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
Key Terms
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Interpretations of Ed
PRICE ELASTICITY OF DEMAND
Elastic Demand
Ed =.04.02
= 2
Inelastic Demand
Ed =.01.02
= .5
Unit Elasticity
Ed =.02.02
= 1
7 - 7Copyright 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
Key Terms
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NextSlide
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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
7 - 8Copyright 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
Key Terms
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NextSlide
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Refinement – The Midpoint Formula
PRICE ELASTICITY OF DEMAND
Ed =
Change inquantity
Sum ofQuantities/2
Change inprice
Sum ofprices/2
7 - 9Copyright 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
Key Terms
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NextSlide
EndEndShowShow
Q
P
D
When prices are low,
TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
So is total revenue
7 - 10Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Q
P
D
Total revenue riseswith price to a
point... TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
7 - 11Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Q
P
D
Total revenue riseswith price to a
point...
then declines
TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
7 - 12Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Q
P
D
Total revenue riseswith price to a
point...
then declines
TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
7 - 13Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Q
P
D
Total revenue riseswith price to a
point...
then declines
TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Total Revenue Test
7 - 14Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Q
P
D
Total revenue riseswith price to a
point...
then declines
InelasticDemand
InelasticDemand
TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
7 - 15Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Q
P
D
Total revenue riseswith price to a
point...
then declines
ElasticDemand
ElasticDemand
InelasticDemand
TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
InelasticDemand
7 - 16Copyright 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
Key Terms
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NextSlide
EndEndShowShow
Q
P
D
Total revenue riseswith price to a
point...
then declines
ElasticDemand
ElasticDemand
InelasticDemand
TR
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
InelasticDemand
UnitElastic
7 - 17Copyright 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
Key Terms
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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
7 - 18Copyright 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
Key Terms
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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
7 - 19Copyright 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
Key Terms
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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
7 - 20Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Po
P
Q
D1
Qo
An increase indemand withoutenough time tochange supplycauses…
Sm
Immediate Market periodPRICE ELASTICITY OF SUPPLY
7 - 21Copyright 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
Key Terms
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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
7 - 22Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Po
P
Q
D1
Qo
Short RunPRICE ELASTICITY OF SUPPLY
An increase indemand withless intensitysupply usecauses...
Ss
7 - 23Copyright 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
Key Terms
PreviousSlide
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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
7 - 24Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Po
P
Q
D1
Qo
Long RunPRICE ELASTICITY OF SUPPLY
An increase indemand in thelong run allowsgreater changecausing...
SL
7 - 25Copyright 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
Key Terms
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NextSlide
EndEndShowShow
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
7 - 26Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Applications of Price Elasticity of Supply
Antiques and ReproductionsVolatile Gold Prices
PRICE ELASTICITY OF SUPPLY
7 - 27Copyright 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
Key Terms
PreviousSlide
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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
7 - 28Copyright 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
Key Terms
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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
7 - 30Copyright 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
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Next: Chapter 8
Consumer Behaviorand
Utility Maximization
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