chapter 5 elasticity.ppt

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Copyright © 2004 South-Western

55Elasticity and Its

Applications



Copyright © 2004 South-Western/Thoson !earning

In this chapter" loo# $or the ans%ers

to these &uestions'

• What is elasticity? What kinds of issues can

elasticity help us to understand?

• What is the price elasticity of demand?How is it related to the demand curve?

How is it related to revenue & expenditure?

• What are the income and cross-price elasticities of

demand?

• What is the price elasticity of supply?

How is it related to the supply curve?




Elasticity ( ( (

• … allows us to analyze supply and demand

with greater precision.

• … is a measure of how much buyers and sellers

respond to changes in market conditions




Elastic – stretchy, flexible, ndex of reaction

nelastic – ri!id, inflexible

Elasticities measure how responsive one variable is in

response to another variable, independent of units"

Elasticity is a numerical measure of the relative

responsiveness of #uantity demanded $Qd % or #uantity

supplied $Qs % to one of its determinants keepin! other

determinants constant"

easures the percenta!e chan!e in a variable in response

to a percenta!e chan!e in another variable"

'ar!er the value of elasticity, the more responsiveness is

#uantity demanded to chan!es in the determinant under

consideration

Elasticity ( ( (




E!ASTICIT) *+ ,EA.,

(emand elasticity measures the relative

responsiveness of #uantity demanded to chan!es

in one of the determinant, assumin! other

determinants remain unchan!ed

easures the percenta!e chan!e in #uantity

demanded of a commodity in response to )*

chan!e in one of the determinant, assumin! otherdeterminants remain unchan!ed "




E!ASTICIT) *+ ,EA., ' T)ES

+ypes of Elasticity of (emand depends onwhich determinant brin!s out a chan!e in

#uantity demanded of a commodity

(eterminant of (emand Elasticity of (emand

rice of the .ommodity rice elasticity of demand

ncome of the .onsumer ncome elasticity of demand

rice of /elated .ommodity .ross elasticity of demand0dvertisement Expenditure romotional elasticity of

demand

rice Expectation Expectations elasticity of

demand



Copyright © 2004 South-Western/Thoson !earning7

rice Elasticity o$ ,eand

• rice elasticity of demand measures how much Qd

responds to a change in P .

Price elasticity

of demand=

Percentage change in Qd

Percentage change in P

Loosely speaking, it measures the price-sensitiity of

buyers! demand.

Price elasticity of demand is relative responsiveness of

#uantity demanded of a commodity to a chan!e in

price of the commodity, keepin! other determinants

of demand constant"





Price elasticity

of demand

e"uals

P

Q

D

Q1

P 1

P )

Q)

P rises by #$%

Q falls

by #&%

#&%

#$%= #.&

Price elasticityof demand

= Percentage change in Qd


'(ample)


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9


*long a D cure, P and Q moe

in opposite directions, which

would make price elasticity

negatie.

+e will drop the minus signand report all price elasticities

as positie numbers.

*long a D cure, P and Q moe

in opposite directions, whichwould make price elasticity

negatie.

+e will drop the minus sign

and report all price elasticities

as positie numbers.

P

Q

D

Q1

P 1

P )

Q)

Price elasticityof demand =

Percentage change in Qd




ICE E!ASTICIT) *+ ,EA.,

mportant 2bservations

rice elasticity, ep will always have a ne!ative value,

because of inverse relationship between price and

#uantity demanded rice elasticity, ep is a ratio of mar!inal demand

d34d to avera!e demand 34

Elasticity is unit less or dimension less concept

+he coefficient of elasticity is ordered accordin! toabsolute value as opposed to al!ebraic value" Hence an

elasticity of –1 is !reater than an elasticity of -)



11

Calculating ercentage Changes

P

Q

D

&

$

#

*

/emand for

ice-cream

0tandard method

of computing the

percentage 1%2 change)

end alue 3 start alue

start alue( #$$%

4oing from * to ,the % change in P e"uals

1&3$25$ = &%



12


P

Q

D

&

$

#

*

/emand for

6ce-cream

Problem:

7he standard method gies

different answers depending on

where you start.

8rom * to ,

P rises &%, Q falls 99%,

elasticity = 995& = #.99

8rom to *,

P falls $%, Q rises &$%,

elasticity = &$5$ = .&$


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Calculating ercentageChanges

• 0o, we instead use the midpoint $arc% method)

end alue 3 start alue

midpoint ( #$$%

7he midpoint is the number halfway between the

start : end alues, the aerage of those alues.

6t doesn!t matter which alue you use as the ;start<

and which as the ;end< 3 you get the same answer

either way



The idpoint ethod' A 1etterWay to Calculate ercentage

Changes and Elasticities• 7he midpoint $arc% formula is preferable

when calculating the price elasticity of demand

because it gies the same answer regardless of

the direction of the change.

P r i c e e l a s t i c i t y o f d e m a n d =1 2 5 > 1 2 5 ?

1 2 5 > 1 2 5 ?

Q Q Q Q

P P P P

, # , #

, # , #

,

,

− +

− +

+here @# = 6nitial @uantity demanded

@ = @uantity demanded after price change

P# = 6nitial Price

P = Ahanged Price




• Bsing the midpoint $arc% method, the % change in P

e"uals

& 3 $.&

( #$$% = .%

7he % change in Q e"uals

# 3 #$

( #$$% = C$.$%

7he price elasticity of demand e"uals

C$5. = #.



Calculating rice Elasticity o$,eand gien ,eand +unction

d3d

d 3d

5ep 6 6

7iven demand function 3d 5 a - b

7he /emand function for ballpoint pen is

P = $$ 3 @d

Aompute price elasticity at a price of Ds. #$.

*t P = #$, @d = E&, d@d 5 dP = - $.&

= = 1-$.&2 F 1#$ 5 E&2 = - $.$&Gd3d

d 3d

6 6 ep



The 3ariety o$ ,eand Cures

• 6nelastic /emand

• @uantity demanded does not respond strongly to

price changes.

• Price elasticity of demand is less than one.

• 'lastic /emand

• @uantity demanded responds strongly to changes in

price.• Price elasticity of demand is greater than one.



The 3ariety o$ ,eand Cures

• 7he price elasticity of demand is closely

related to the slope of the demand cure.

• Dule of thumb)7he flatter the cure, the bigger the elasticity.

7he steeper the cure, the smaller the elasticity.

• 8ie different classifications of D cures.…



Q)

P )

D

“Perfectly inelastic demand” (one extreme case)

P

Q

P 1

P falls

by #$%

Q changes

by $%

$%#$%

= $Price elasticityof demand

= % change in Q

% change in P =

Aonsumers!

price sensitiity)

D cure)

'lasticity)

ertical

none

$



D

“Relatively Inelastic Demand”

P

QQ)

P )

Q1

P 1

Q rises less

than #$%

H #$%

#$%H #Price elasticity

of demand= % change in Q

% change in P =

P falls

by #$%

Aonsumers!

price sensitiity)

D cure)

'lasticity)

relatiely steep

relatiely low

H #



D

“Unit Elastic Demand”

P

QQ)

P )

Q1

P 1

Q rises by #$%

#$%

#$%= #Price elasticity


% change in P =

P falls

by #$%

Aonsumers!

price sensitiity)

'lasticity)

intermediate

#

D cure)

intermediate slope



22

D

“ Relatively Elastic Demand”

P

QQ)

P )

Q1

P 1

Q rises more

than #$%

I #$%

#$%I #Price elasticity


% change in P =

P falls

by #$%

Aonsumers!

price sensitiity)

D cure)

'lasticity)

relatiely flat

relatiely high

I #



23

D

“Perfectly Elastic Demand” (the other extreme)

P

Q

P )

Q)

P changes

by $%

Q changes

by any %

any %$%

= infinity

Q1

P 1 =Aonsumers!

price sensitiity)

D cure)

'lasticity)

infinity

horizontal

e(treme

Price elasticityof demand

= % change in Q

% change in P =



ICE E!ASTICIT) *+ ,EA., 'A.ES

erfectly nelastic $ep 5 8% 0ny chan!e in price does notbrin! any chan!e in #uantity demanded

/elatively nelastic $89ep 9)% roportionate chan!e in

price is !reater than proportionate chan!e in #uantity

demanded :nitary Elastic $ep 5)% roportionate chan!e in price

results an e#ually proportionate chan!e in #uantity

demanded

/elatively Elastic $)9ep 9% roportionate chan!e in

#uantity demanded is !reater than proportionate chan!e in

price

erfectly Elastic $ep 5 % (emand chan!es si!nificantly,

even if there is no chan!e in price



• 4eometrical 1/iagrammatic2) Datio of the twosegments of the horizontal a(is identified by theintersection of the tangent to the point

considered, with the horizontal a(is and by the perpendicular from that point to the same a(is

• Lower segment of the tangent

Bpper segment of the tangent

ICE E!ASTICIT) *+ ,EA.,' *.A ,EA., C63E

ep 666666666666 66 5



26

Elasticity o$ a ,eand Cure

P

Q$

A

C

B

ep 5 8 4 0; 5 8

ep 5 0. 4 ;. 5 ), . is themid point of 0;

ep 5 0; 4 8 5 <

ep = )

ep 9 )



ICE E!ASTICIT) *+ ,EA.,' I. A!I.EA ,EA., C363E

>3 73

> 7

5

ep 5>343

>4 66 5

3)31

)1

66 66 23)

2)

77E

66 23)

2)

5 66 5 723)

66 7E

2) 66

53)(

23)

66

2)

2) 66 5

23)

3)( 66 66

.E

E( 5




Elasticity o$ a !inear ,eand Cure

7he slopeof a linear

demand

cure is

constant, but its

elasticity

is not.

P

Q

Ds.9$

$

#$

Ds.$$ $ C$ G$

$$%

C$%= &.$ E =

GJ%

GJ% = #.$ E =

C$%

$$%= $. E =




rice Elasticity and Totaleenue

• Aontinuing our scenario, if you raise your price

from Ds.$ to Ds.&, would your reenue rise or fallK

Deenue = P ( Q

• * price increase has two effects on reenue)• igher P means more reenue on each unit

you sell.

• ut you sell fewer units 1lower Q2,due to Law of /emand.

• +hich of these two effects is biggerK

6t depends on the price elasticity of demand.





• 6f demand is elastic, then

price elasticity of demand I #

% change in Q I % change in P

• 7he fall in reenue from lower Q is greater

than the increase in reenue from higher P ,

so reenue falls.

Deenue = P ( Q

Price elasticity

of demand=

Percentage change in Q






'lastic demand1elasticity = #.2 P

Q

D

Ds.$

#

6f P = Ds.$,

Q = # and reenue= Ds.C$.

+hen D is elastic,

a price increase

causes reenue to fall.

Ds.&

6f P = Ds.&,

Q = and

reenue = Ds.$$.

lost

reenue

due tolower Q

increased

reenue due

to higher P

(emand force-cream





• 6f demand is inelastic, then

price elasticity of demand H #

% change in Q H % change in P

• 7he fall in reenue from lower Q is smaller

than the increase in reenue from higher P ,

so reenue rises.

• 6n our e(ample, suppose that Q only falls to #$ 1instead

of 2 when you raise your price to Ds.&.

Deenue = P ( Q

Price elasticity

of demand=

Percentage change in Q






Mow, demand isinelastic)

elasticity = $. P

Q

D

Ds.$

#

6f P = Ds.$,

Q = # and reenue

= Ds.C$. Ds.&

#$

6f P = Ds.&,

Q = #$ andreenue = Ds.&$.

+hen D is inelastic,

a price increase

causes reenue to rise.

lost

reenue

due tolower Q

increased

reenue due

to higher P

(emand force-cream





rice 3uantity

+otal/even

ue

*.han!e

rice

*.han!e

3uantity

Elasticity

(escription

J $ $G # -#&.C $$.$ -#9.$ Delatiely 'lastic

& C $ -#. GG.J -9.J Delatiely 'lastic

C G C -. C$.$ -#. Delatiely 'lastic

9 C -.G .G -#.$ Bnitary 'lastic

#$ $ -C$.$ . -$.G Delatiely6nelastic

# # # -GG.J #. -$.9 Delatiely6nelastic

$ #C $ -$$.$ #&.C -$.# Delatiely




+otal 2utlay or /evenue or Expenditure ethod

ICE E!ASTICIT) *+ ,EA.,'EAS6EE.T

ncrease in

+otal/evenue

(ecrease in

+otal/evenue

+otal

/evenue/emainin!

.onstant

ncrease in

rice

@E'0A+.

(E0@(

E'0A+.

(E0@(

:@+

E'0A+.(E0@(

(ecrease in

rice

E'0A+.

(E0@(

@E'0A+.

(E0@(

:@+

E'0A+.

(E0@(




What deterines price elasticity8

7o learn the determinants of price elasticity,

we look at a series of e(amples.

'ach compares two common goods.

6n each e(ample)

• 0uppose the prices of both goods rise by $%.

• 7he good for which Qd falls the most 1in percent2 has

the highest price elasticity of demand.+hich good is itK +hyK

• +hat lesson does the e(ample teach us about the

determinants of the price elasticity of demandK




E9A!E :'

Thups-up s( Sugar • 7he prices of both of these goods rise by $%.

8or which good does Qd drop the mostK +hyK

• 7humps-up has lots of close substitutes

1e.g ., Aoca Aola, 0prite2,so buyers can easily switch if the price rises.

• 0ugar has no close substitutes,

so consumers would probably not buy much less if its price rises.

'esson Price elasticity is higher when close

substitutes are available .




E9A!E 2'

;1lue <eans= s( ;Clothing=• 7he prices of both goods rise by $%.


• 8or a narrowly defined good such as

blue Neans, there are many substitutes

1khakis, shorts, 0peedos2.

• 7here are fewer substitutes aailable for broadly

defined goods.

1Aan you think of a substitute for clothing,other than liing in a nudist colonyK2

'esson Price elasticity is higher for narrowly

defined goods than broadly defined ones.




E9A!E >'

Insulin s( Car

• 7he prices of both of these goods rise by $%.


• 7o millions of diabetics, insulin is a necessity.

* rise in its price would cause little or no decrease

in demand.

• * car is a lu(ury. 6f the price rises,

some people will forego it.

'esson Price elasticity is higher for luxuries than for

necessities. or necessities! it is inelastic.

E9A!E 4'




E9A!E 4'

asoline in the Short un s(

asoline in the !ong un• 7he price of gasoline rises $%. /oes Qd drop more in

the short run or the long runK +hyK

• 7here!s not much people can do in the

short run, other than ride the bus or carpool.• 6n the long run, people can buy smaller cars

or lie closer to where they work.

'esson Price elasticity is higher in thelong run than the short run.

The ,eterinants o$ rice Elasticity'




The ,eterinants o$ rice Elasticity'

A Suary

7he price elasticity of demand depends on)

the e(tent to which close substitutes are aailable

whether the good is a necessity or a lu(ury

how broadly or narrowly the good is defined

the time horizon) elasticity is higher in the long

run than the short run.

7he price elasticity of demand depends on)

the e(tent to which close substitutes are aailable

whether the good is a necessity or a lu(ury

how broadly or narrowly the good is defined

the time horizon) elasticity is higher in the long

run than the short run.




BCthe responsiveness of demand to a chan!e in

consumer income, D

t is computed as the percenta!e chan!e in the #uantity

demanded divided by the percenta!e chan!e in income"f we substitute variable Bincome for variable Bprice,

then the formula for measurin! income-elasticity of

demand is same as for measurin! price-elasticity of

demand

ncome elasticity of demand is always positive except for

inferior !oods

I.C*E E!ASTICIT) *+ ,EA.,




'(ample) C /O/s demanded 1@d2 when consumer!s income 12 isDs. $$$$. +hen income increased to Ds. &$$$, demand for

/O/ increases to 9$. Aalculate income elasticity of demand. 1use

mid-point method2

*nswer) ey = % Q in @d 5 % Q in

= 119$ -C2519$RC22 5 11&$$$ 3 $$$$2 5 1&$$$R$$$$22= 1G 5 &C 2 5 1&$$$ 5 C&$$$2 = 1 #5E 2 5 1#5E2 = #

18ind what you are getting using percentage method2Bnitary income elasticity of demand implying #% increase in

income of the consumer leads to # % increase in "uantity demanded of

/O//O/ in "uestion is a normal commodity since income elasticity of

demand is positie

EASS6I. I.C*E E!ASTICIT)*+ ,EA.,




f demand function is !iven $3d is a function of ncome%

Aalculate income elasticity of demand at income leel 12 of Ds.

&$$$ if the demand function is @d = G$$ - $.$

*nswer) *t = &,$$$, "uantity demanded = G$$ - &$$ = #$$

ey =1 d@ 5 d2 F 1 5 @2

= 1-2$.$ F 1&$$$ 5 #$$2 = 1-2 &6ncome elasticity of demand is elastic in nature implying #% increase

in income of the consumer leads to & % decrease in "uantity demanded

of the commodity7he commodity in "uestion is an inferior commodity since income

elasticity of demand is negatie.

EASS6I. I.C*E E!ASTICIT)*+ ,EA.,




@ature of .ommodities and ncome Elasticity of (emand

I.C*E E!ASTICIT) *+ ,EA.,

7oods ncome-elasticity Effect on sale

Essential or@ecessary!oods

'ess than unity 'ess than proportionatechan!e in sale

.omforts or

Aemi-luxuries

0lmost e#ual to

unity

0lmost proportionate

chan!e in sale'uxuries 7reater than

unityore than proportionateincrease in sale




BCthe responsiveness of demand of a commodity to a chan!ein the price of its related $substitutes and complementary%commodities

t is computed as the percenta!e chan!e in the #uantitydemanded divided by the percenta!e chan!e in the price ofsubstitute or complementary commodities"

ositive cross elasticity Aubstitutes

@e!ative cross elasticity .omplementary commodities

Fero cross elasticity ndependent commodities

+he !reater the absolute value of cross elasticity of demand, themore intense is the relationship existin! between the two !oods

C*SS E!ASTICIT) *+ ,EA.,

EAS6I. C*SS E!ASTICIT)




EAS6I. C*SS E!ASTICIT)*+ ,EA.,

'(ample) units of Pizza is demanded 1@d2 when the price ofurger is Ds. $. +hen price of urger increases to Ds. &,

demand for Pizza increases to C. Aalculate cross elasticity of

demand using mid-point method.

*nswer) eP = % Q in @d of Pizza 5 % Q in Price of urger

= 11C -251CR22 5 11& 3 $2 5 1&R$22

= 1 5 G 2 5 1& 5 C&2 = 1 #59 2 5 1#5E2 = 9

Aross elasticity of demand is elastic in nature, implying #%increase in price of urger leads to 9 % increase in "uantity

demanded of Pizza.Pizza and urger in "uestion are substitute commodities since

cross elasticity of demand is positie.




f demand function is !iven $3d is a function of rice of relatedcommodity%

7he demand function for urger is estimated at

@ = G - $. P7, +here @ = @uantity demanded of urger and P7 is the

Price of 7omato Setchup.

Aalculate cross elasticity of demand at P7 = $.*nswer) *t P7 = $, @ = G - C =

e7 =1 d @ 5 d P72 F 1P7 5 @2

= 1-2$. F 1$ 5 2 = 1-2 Aross elasticity of demand is elastic in nature implying #% increase in Price

of 7omato Setchup leads to % decrease in "uantity demanded for urger urger and 7omato Setchup in "uestion are complementary to each other

since cross elasticity of demand is negatie.

EASS6I. C*SS E!ASTICIT)*+ ,EA.,




7ime +atch Ao. assembles wrist watches and sells in +estern 6ndia. /emandfunction faced by the Aompany is estimated to be

@ = C$,$$$ 3 Pt 3 R CPc+here,@ = Mumber of watches demanded from 7ime +atch Ao.Pt = Price of watches sold by 7ime +atch Ao.

= Per-capita income in +estern 6ndiaPc = Price charged by Aasio +atch Ao, the competitorsAurrently Pt, 6 and Pc are Ds. 9&$, Ds.#$,$$$ and Ds. C$$ respectiely'stimatea2Price elasticity of demandT

b26ncome elasticity of demand and comment on nature of productT

c2Aross elasticity of demand and bring how these two watches relates to eachother.d2/o you recommend an increase in price if 7imes +atch Ao. wanted toma(imise sales reenue K Uustify

E!ASTICIT) *+ ,EA.,




@ = C$,$$$ 3 Pt 3 R CPc+hen Pt, and Pc are Ds. 9&$, Ds.#$,$$$ and Ds. C$$ respectiely,@ = C$,$$$ 3 J$$ 3 $,$$$ R #G$$ = $,E$$

a2 Price elasticity of demand = 1-2 F 19&$ 5 $E$$2 = - J 5 $E = - $.$99CE

b2 6ncome elasticity of demand = 1-2 F 1#$$$$5$E$$2 = - $.EG

Mature of product 3 since ei H $, 6nferior commodity

c2 Aross elasticity of demand = 1C2 F 1C$$5$E$$2 = $.$JGG

Mature of relationship 3 since ei I $, 0ubstitutes

d2es. 0ales can be ma(imised when VD = $ ore p = #.

0ince demand is inelastic, increase in price will increase sales reenue.

E!ASTICIT) *+ ,EA.,




THE E!"TI#IT$ %& "UPP$

• Price elasticity of supply is a measure of howmuch the "uantity supplied of a good responds

to a change in the price of that good.

• Price elasticity of supply is the percentagechange in "uantity supplied resulting from a

percent change in price.




rice Elasticity o$ Supply

• rice elasticity of supply measures how

much Qs responds to a change in P .

Price elasticityof s'ly

Percenta*e chan*e in Q s

Percenta*e chan*e in P

Loosely speaking, it measures the price-sensitiity of

sellers! supply.

*gain, use the midpoint method to compute the

percentage changes.




Q 2

?0


C& units of pen is supplied

at a price Ds.#$. +hen

price increases to Ds. #&,

$ units is supplied. 8ind

elasticity of supply.

P

Q

S

P 2

:5

Q :

45

P :

:0

P rises+y ,-.

Q rises+y /0.

/0.

,-. 12,


Percenta*e chan*e in Q s

Percenta*e chan*e in P

E@aple'





Q 2

?0


7he supply function for ballpoint pen is

@s = #$$ R P

Aompute price elasticity at a price ofDs. #$.

*t P = #$, @s = #$, d@s 5 dP =

P

Q

S

P 2

:5

Q :

45

P :

:0

Examle3

rice Elasticity of Aupply 7iven Aupply unction

d3s

d 3s 5es 6 6

es = F 1#$5#$2 = #5G




The 3ariety o$ Supply Cures

• 'conomists classify supply cures according totheir elasticity.

• 7he slope of the supply cure is closely related

to price elasticity of supply.• Dule of thumb)

7he flatter the cure, the bigger the elasticity.

7he steeper the cure, the smaller the elasticity.• 7he ne(t slides present the different

classifications, from least to most elastic.




S

;er$ectly inelastic= one e@treeB

P

Q Q :

P :

P 2

Q chan*es+y -.

-.1-.

-Price elasticity

of s'ly

. chan*e in Q

. chan*e in P

P rises+y 1-.

0ellers!

price sensitiity)

" cure)

'lasticity)

ertical

$

$




S

;Inelastic=

P

Q Q :

P :

Q 2

P 2

Q rises less

than 1-.

4 1-.1-.

4 1Price elasticity

of s'ly

. chan*e inQ

. chan*e in P

P rises+y 1-.

0ellers!

price sensitiity)

" cure)

'lasticity)

relatiely steep

relatiely low

H #




S

;6nit elastic=

P

Q Q :

P :

Q 2

P 2

Q rises

+y 1-.

1-.1-.

1Price elasticity

of s'ly

. chan*e in Q . chan*e in P

P rises+y 1-.

0ellers!

price sensitiity)

" cure)

'lasticity)

intermediate slope

intermediate

= #




S

;Elastic=

P

Q Q :

P :

Q 2

P 2

Q rises more

than 1-.

5 1-.1-.

5 1Price elasticity

of s'ly

. chan*e in Q

. chan*e in P

P rises+y 1-.

0ellers!

price sensitiity)

" cure)

'lasticity)

relatiely flat

relatiely high

I #




S

;er$ectly elastic= the other e@treeB

P

Q

P :

Q :

P chan*es+y -.

Q chan*es

+y any .

any .-.

infinityPrice elasticity

of s'ly

. chan*e in Q . chan*e in P

Q 2

P 2 0ellers!

price sensitiity)

" cure)

'lasticity)

horizontal

e(treme

infinity




The ,eterinants o$ Supply Elasticity

• 7he more easily sellers can change the "uantitythey produce, the greater the price elasticity of

supply.

• '(ample) 0upply of beachfront property isharder to ary and thus less elastic than

supply of new cars.

• 8or many goods, price elasticity of supply isgreater in the long run than in the short run,

because firms can build new factories, or

new firms may be able to enter the market.




A!ICATI*. o$ E!ASTICIT)

• Aan good news for farming be bad news forfarmersK

• +hat happens to wheat farmers and the market

for wheat when uniersity agronomists discoera new wheat hybrid that is more productie

than e(isting arietiesK

TE A!ICATI*. *+ S6!)




TE A!ICATI*. *+ S6!)",EA.," A., E!ASTICIT)

• '(amine whether the supply or demand cureshifts.

• /etermine the direction of the shift of the

cure.• Bse the supply-and-demand diagram to see

how the market e"uilibrium changes.

An Increase in Supply in the ar#et $or Wheat



pp y

Copyright©200> South%estern/Thoson !earning

Duantity o$

Wheat

-

rice o$

Wheat

62 2 2 2 and a roortionately smaller

increase in 7'antity sold2 !s a res'lt8

reven'e falls from 96-- to 9::-2

Demand

S 1S :

:2 2 2 2 leads

to a lar*e fall

in rice 2 2 2

12 ;hen demand is inelastic8

an increase in s'ly 2 2 2

:

11-

96

1--




"'mmary

• Price elasticity of demand measures how muchthe "uantity demanded responds to changes in

the price.

• Price elasticity of demand is calculated as the percentage change in "uantity demanded

diided by the percentage change in price.

• 6f a demand cure is elastic, total reenue fallswhen the price rises.

• 6f it is inelastic, total reenue rises as the price

rises.




"'mmary

• 7he income elasticity of demand measures howmuch the "uantity demanded responds to

changes in consumers! income.

• 7he cross-price elasticity of demand measureshow much the "uantity demanded of one good

responds to the price of another good.

• 7he price elasticity of supply measures howmuch the "uantity supplied responds to changes

in the price. .



"'mmary

• 6n most markets, supply is more elastic in thelong run than in the short run.

• 7he price elasticity of supply is calculated as

the percentage change in "uantity supplieddiided by the percentage change in price.

• 7he tools of supply and demand can be applied

in many different types of markets.

chapter 5 elasticity.ppt

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