elasticity of demand and supply · demand elasticity •demand elasticity r8 = • demand...

Spring, 2017

Elasticity of Demand and SupplyEconomic Department, Saint Louis University

Instructor: Xi Wang

RoadMap

• Background

• Motivation of Elasticity

• Elasticity, Demand curve

• Elasticity, Supply curve

• Why do we care about Elasticity?

• Background: Motivation of Elasticity




Demand law

• The law of demand states that a fall in the price of a good raises the quantity demanded.

• Let me ask a question: how much will demand quantity fall if I decrease the price by $1?

• Is it a meaningful question?

Example

• Price of Audi R8 is $226,898 now

• How will the demand quantity change if I decrease the price by $1?

• Price of Small lattie is $1.95

• How will the demand quantity change if I decrease the price by $1?

• Comparable? Can we state that demand of R8 is more stable?

Example continue

• No, since $1 is so trivial when compared to $226,898

• And $1 is significant when compared to $1.95

• Which means, if I decrease the price of lattie by $1, I reduce the price by 51.28%.

Example continue

• Which means, if I decrease the price of R8 by $1, I reduce the price by 0.04%. Almost nothing.

• Hence I should not ask this question what if I reduce the price by $1

• I should ask the question what if I reduce the price by 1%?

Demand law

• Ok, let me try again

• What happens to demand quantities of R8, if I reduce the price by 1%?

• What happens to demand quantities of Lattie, if I reduce the price by 1%?

• Is it meaningful then? Or can we compare the number?

Example

• Audi R8, now at the price of $226,898, can sell 20,000/year in U.S.

• Lattie, now at the price of $1.5, can sell 1,000,000,000 cups/year in U.S

• When we reduce the price, yes, of course, the demand quantity will increase.

• Say R8 got 2000 more sold. Lattie got 30,000,000 more sold

Example

• Can we comprare these two numbers?

• No, again, we should check how much in percent does this discount improve the sale.

• 2000/20,000= 10%

• 30,000,000/1,000,000,000= 3%

Demand Elasticity

• Demand Elasticity = pricein change Percentagedemandedquantity in change Percentage

Demand Elasticity

• Demand Elasticity R8 =

• Demand Elasticity Lattie =

• Necessities tend to have inelastic demands, where as luxuries have elastic demands. When the price of a doctor’s visit rises, people will not dramatically reduce the number of times they go to the doctor, although they might go somewhat less often.

101%10%

31%3%

Details: How to calculate a Demand Elasticity

• Suppose we have two point on Demand curve

• Point A: Price : $4 , Quantity : 120

• Point B: Price : $6 , Quantity : 80

From A to B, Price increases $2, so increases 50%.

Quantity Decreases 40, so decreases 33%

Elasticity= 66.0%50%33

Details: How to calculate a Demand Elasticity




From B to A, Price decrease $2, so increases 33%.

Quantity increases 40, so increases 50%

Elasticity= 51.1%33%50

Details: middle point




From A to B, Price changes $2, so averagely changes

Quantity changes 40, so averagely changes

Elasticity= 1%40%40

%4052

%4010040

What does Elasticity Represent?

4743.05.4/1

95/10

35.4/1

75/50

What does Elasticity Represent?

What is the elasticity? 1?

Supply Elasticity

• Supply Elasticity will be defined in a smilar way.

• Demand Elasticity =

• Middle point method applies again.

pricein change Percentagesuppliedquantity in change Percentage

Supply Elasticity

0.42865.4/1

105/10

Exercise

Why shall we care about Elasticity?

• Is good news good for farmers?

• Good seeds comes out

• Reduce the production cost

• Push supply curve to the right

• How much are the revenues of these equilibria? Why?


• Let's compare two demand curve

What is the elasticity of this demand curve?

What is the elasticity of this demand curve?


• Let's compare two demand curve. Elasticity < or > 1?

238.0105/10

5.2/1 3.2857

130/605.2/4.0

elasticity of demand and supply · demand elasticity •demand elasticity r8 = • demand...

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