principles of microeconomics & principles of macroeconomics: ch. 5 second canadian edition...
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![Page 1: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/1.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Chapter 5
Elasticity and Its Applications
© 2002 by Nelson, a division of Thomson Canada Limited
![Page 2: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/2.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Overview
ElasticityElasticity of DemandElasticity of SupplyApplications of Elasticity
![Page 3: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/3.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity . . .
… is a measure of how much buyers
and sellers respond to changes in
market conditions. . .
… allows us to analyze supply and
demand with greater precision.
![Page 4: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/4.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity: A General Definition:
The percentage (%) change in
something . . .
. . . given a one percent (1%) change
in something else.
![Page 5: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/5.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Three Types of Elasticities. . .
Price Elasticity of Demand
Income ElasticityPrice Elasticity of
Supply
Price
Quantity
![Page 6: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/6.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Overview
ElasticityElasticity of DemandElasticity of SupplyApplications of Elasticity
![Page 7: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/7.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Price Elasticity of Demand
The percentage change in the quantity
demanded given. . .
. . . a one percent change in the price.
A
B
DemandP
Q
![Page 8: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/8.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Ranges of Elasticity . . .
Perfectly Inelastic Consumers are
“completely unresponsive” to price changes.
Perfectly Elastic Consumers are “infinitely
responsive” to price changes.
Unit Elastic Consumer’s response is “equal
to” change in price.
![Page 9: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/9.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity of Demand Illustrated
Perfectly Inelastic
P2
P1
Even if priceincreases a lot quantity demanded stays the same.
![Page 10: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/10.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity of Demand Illustrated
Perfectly Elastic
P1
A small increasein price will causedemand to drop offcompletely.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Determinants of Price Elasticity of Demand
Demand tends to be more elastic:– if the good is a luxury;
– the longer the time period;
– the greater the number of close substitutes; and
– the more narrowly defined the market.
![Page 12: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/12.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Determinants of Price Elasticity of Demand
Demand tends to be more inelastic:– if the good is a necessity;
– the shorter the adjustment time;
– if there are few good substitutes; and
– the more broadly defined the market.
![Page 13: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/13.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Computing Elasticity Coefficient
Computed as the percentage change in the quantity demanded divided by the percentage change in price.
Price Elasticityof Demand
=
Percentage Change in Quantity Demanded
Percentage Change in Price
![Page 14: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/14.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED
($2.20 - $2.00) / $2.00
(8 - 10) / 10
=
![Page 15: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/15.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED
(10%)
(20%)
=
![Page 16: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/16.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED= 2
![Page 17: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/17.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED= 2
Demand is Elastic
![Page 18: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/18.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity and Total Revenue
Over the Elastic Range of
prices and quantity
the relationship between price and total revenue is
INDIRECT or OPPOSITE
![Page 19: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/19.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity and Total Revenue
ED > 1 then
P Q TRand
![Page 20: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/20.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity and Total Revenue
Over the Inelastic Range of prices and quantity
the relationship between price and total revenue is
DIRECT or THE SAME
![Page 21: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/21.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity and Total Revenue
ED < 1 then
P Q TRand
![Page 22: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/22.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Income Elasticity of Demand
The percentage change in the quantity demanded
given a one percent change in income.
![Page 23: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/23.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Computing Income Elasticity
Computed as the percentage change in demand divided by the percentage change in Income.
Income Elasticityof Demand
=
Percentage Change in Demand
Percentage Change in Income
![Page 24: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/24.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Income Elasticity... Types
YD > 0 Normal Goods
YD < 0 Inferior Goods
YD = 0 Income-neutral Goods
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Income Elasticity... Types
Goods consumers regard as “necessities” tend to be income inelastic...– Examples include: food, fuel, clothing,
utilities, & medical services.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Income Elasticity... Types
Goods consumers regard as “luxuries” tend to be income elastic...– Examples include: Sports cars, furs, and
expensive foods.
![Page 27: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/27.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Quick Quiz!
Define the price elasticity of demand.
Explain the relationship between total revenue and elasticity of demand
![Page 28: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/28.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Overview
ElasticityElasticity of DemandElasticity of SupplyApplications of Elasticity
![Page 29: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/29.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Price Elasticity of Supply
The percentage change in
quantity supplied
resulting from a one (1) percent change in price.
Price
Quantity
A
B
![Page 30: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/30.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Ranges of Elasticity
Perfectly Elastic infinite Relatively Elastic >1 Unitary or Unit =1 Relatively Inelastic <1 Perfectly Inelastic = 0
![Page 31: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/31.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Elasticity of Supply Illustrated
Perfectly Inelastic
Perfectly Elastic
P
Q
![Page 32: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/32.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Determinants of Elasticity of Supply
Flexibility or ability of sellers to change the amount of the good they produce.– Beachfront land vs. books, cars,
manufactured goods, etc.
– More elastic in the long run.
![Page 33: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/33.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Computing Elasticity Coefficient
Computed as the percentage change in the quantity supplied divided by the percentage change in price.
Elasticityof Supply
=
Percentage Change in Quantity Supplied
Percentage Change in Price
![Page 34: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/34.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Quick Quiz!
Define the elasticity of supply.
Explain why the price elasticity of supply might be different in the long run than in the short run.
![Page 35: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/35.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Overview
ElasticityElasticity of DemandElasticity of SupplyApplications of Elasticity
![Page 36: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/36.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Applications of Elasticity
“Can Good News for Farming Be Bad News For Farmers?”
What happens to wheat farmers and the market for wheat when university agronomists discover a new wheat hybrid that is more productive than existing varieties?
![Page 37: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/37.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Apply Comparative Statics
Examine whether the supply or demand curve shifts.
Consider the direction the curve shifts.
Use supply-and-demand diagrams to see how the market equilibrium changes. Consider the state of elasticity.
![Page 38: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/38.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Examine whether the supply or demand curve shifts.
SA
DA
Price
Quantity
$4.00
2000
![Page 39: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/39.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Consider which direction the curve shifts.
SA
DA
Price
Quantity
$4.00
2000
SB
Technologycauses an increasein supply.
![Page 40: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/40.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Use Supply-and-Demand diagram to see how the market changes.
SA
DA
Price
Quantity
$4.00
2000
SB
2400
$2.60
![Page 41: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/41.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Compute Elasticity
ED =(2400 - 2000) / (2000)
($2.60 - $4.00) / ($4.00)
ED = 0.57 (Inelastic)
![Page 42: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/42.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Observe the Change in Total Revenue
SA
DA
Price
Quantity
$4.00
2000
SB
2400
$2.60
TRSA = $8,000
TRSB = $5,760!
![Page 43: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/43.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Applications of Elasticity
“Does a War on Drug Dealers Reduce Drug-Related Crime?”
What happens to drug-related crime such as theft and violent behaviour when police and custom officers impose higher penalties and stricter enforcement on drug dealers?
![Page 44: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/44.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Apply Comparative Statics
Examine whether the supply or demand curve shifts.
Consider the direction the curve shifts.
Use supply-and-demand diagrams to see how the market equilibrium changes. Consider the state of elasticity.
![Page 45: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/45.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Apply Comparative Statics
Going after drug dealers affects the supply of drugs such as heroin.
This policy reduces supply.The price of illegal drugs will increase.
Since the demand for addictive drugs is inelastic, drug users will need to spend more in total dollars on drugs.Drug-related crime will increase!
![Page 46: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/46.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Drug Education Policy?Educating the public with regard to the bad
effects of drug use will affect the demand for illegal drugs.
This policy reduces demand.The price of illegal drugs will decrease.
Since the demand for addictive drugs is inelastic, drug users spend less in total dollars on drugs.Drug-related crime will decrease!
![Page 47: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/47.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Applications of Elasticity
“Why did OPEC fail to keep the price of oil high in the long run?”
While the OPEC cartel has been successful in achieving short run bursts in oil prices, over the long run these high oil prices have not been maintained.
![Page 48: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/48.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Apply Comparative Statics
Examine whether the supply or demand curve shifts.
Consider the direction the curve shifts.
Use supply-and-demand diagrams to see how the market equilibrium changes. Consider the state of elasticity.
![Page 49: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/49.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Apply Comparative Statics
OPEC’s cartel policy consists of restricting the supply of oil.
The supply for oil will decrease.The price of oil will increase.In the short run, the demand for oil is
inelastic. A higher price for oil will increase the total revenue of OPEC.
![Page 50: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/50.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Apply Comparative StaticsIn the long run, the demand for oil and the
supply of oil becomes more elastic. This will tend to dampen oil prices.
Why is oil inelastic in the short run?– oil is a necessity item– adding to the supply of oil is difficult
Over time elasticity increases due to conservation, alternate energy sources...
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Conclusion
Elasticity is defined as. . .Price Elasticity of demand is. . .Income Elasticity of demand is. . .Price Elasticity of supply is. . .What are the relationships between
elasticity and total revenue or total consumer expenses?
![Page 52: Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition Chapter 5 Elasticity and Its Applications © 2002 by Nelson,](https://reader035.vdocuments.net/reader035/viewer/2022062517/56649f1d5503460f94c34d76/html5/thumbnails/52.jpg)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 Second Canadian Edition
Overview
ElasticityElasticity of DemandElasticity of SupplyApplications of Elasticity