# Elasticity  Price elasticity  demand  supply  Cross elasticity  Income elasticity  Price elasticity  demand  supply  Cross elasticity  Income

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• ElasticityPrice elasticitydemandsupplyCross elasticityIncome elasticity

• Basic ideaWe know when PQdQsholding other factors constant

• but how much?if price doubleshow much does Qd fall?by 10%by 50%by 300%?price elasticity tells us

• equation% change in Qd% change in P

• % change in Qdnew Qd - initial Qdaverage Qdx 100midpoint method

• % change in Pnew P - initial Paverage Px 100midpoint method

• demand elasticity% change in Qd% change in P-100%50%= -2

• If price of latte increases 1%,Qd of latte decreases 2%

• demand elasticitya unit-free measurecompare all goods & serviceschanges for different pointson the demand curve

• if price elasticity of demand(absolute value)= 1unit elastic% change Qd = % change P> 1 elastic% change Qd > %change Psensitive to P changes

• < 1 inelastic% change Qd < %change Pnot sensitive to P changes

• perfectly inelastic demandvertical linechange in Pno change in Qd

• perfectly elastic demandhorizontal lineany change in PQd falls to zero

• effect on total revenuetotal revenue (TR)= P x Qif demand is elastic,TR falls as price risesif demand is inelastic,TR rises as price rises

• what makes demand elastic or inelastic?1. is it a luxury or necessityif luxury, demand is elasticif necessity, demand is inelastic

• 3. time since price changeshort timeno time to adjust,demand is inelasticlong timetime to adjust,demand is elastic

• factors 1-3all get at same issue: can consumers substitute a cheaper good easily?if yes, demand is elasticif no, demand is inelastic

• 4. Is item large part of your budget?if yes, then demand elastic(forced to change behavior)if no, then demand inelastic(no need to change behavior)

• II. Price Elasticity of Supply% change in Qs% change in P

• if price elasticity of supply= 1unit elastic% change Qs = % change P> 1 elastic% change Qs > %change Psensitive to P changes

• < 1 inelastic% change Qs < %change Pnot sensitive to P changes

• perfectly inelastic supplyvertical linechange in Pno change in Qs

• perfectly elastic supplyhorizontal lineany change in PQs falls to zero

• what makes supply elastic or inelastic?1. production possibilitiesCan you make more easily?NO then supply is inelasticYES then supply is elastic

• III. Income Elasticity of Demandimpact of income changes on demandsize of shift in the demand curve when income changes

• equation> 0 normal good< 0 inferior good% change in Qd% change in income

• IV. Cross Elasticity of Demandimpact of price change ofsubstitutes or complements size of shift in demand curve when price of a related good changes

• equation% change in Qd% change in P of related good

• cross elasticity> 0 for substitutes< 0 for complements

• summarylaw of demand & supplydirection of change in Qd/Qswhen P changesprice elasticityhow large are these Qd/Qs changes?cross/income elasticitysize of shift in demand curve