elasticity  price elasticity  demand  supply  cross elasticity  income elasticity ...

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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

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