Ch. 4: Elasticity.

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Ch. 4 Elasticity.

• Define, calculate, and explain the factors that
  influence
• the price elasticity of demand
• the cross elasticity of demand
• the income elasticity of demand
• the elasticity of supply

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Price Elasticity of Demand

• The slope of the demand curve affects how much
  equilibrium price and quantity change for a given
  change in supply.

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Price Elasticity of Demand

• Price elasticity of demand
• units-free measure of the responsiveness of the
  quantity demanded of a good to a change in its
  price, ceteris paribus.

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Price Elasticity of Demand

• DQ DQ/Qavg
• 2/10
• .2
• DP DP/Pavg
• -1/20
• -.05
• e .2/.05 4

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Price Elasticity of Demand

• By using the average price and average quantity,
  we get the same elasticity value regardless of
  whether the price rises or falls.
• Measuring as changes leaves the elasticity
  value the same (units free).
• Although the formula yields a negative value for
  elasticity because price and quantity move in
  opposite directions, we report the absolute
  value.

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Price Elasticity of Demand

• Inelastic and Elastic Demand
• if egt1 elastic
• if e1 unit elastic
• if elt1 inelastic
• Shape of
• Perfectly inelastic demand curve (e0)
• Perfectly elastic demand curve (e infinite)

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Price Elasticity of Demand

• At prices above the mid-point of the demand
  curve, demand is elastic.

At prices below the mid-point of the demand
curve, demand is inelastic.
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Price Elasticity of Demand

• Total Revenue and Elasticity
• TRPQD
• When P changes, TR could rise or fall because QD
  moves in opposite direction.
• But a higher price doesnt always increase total
  revenue.

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Price Elasticity of Demand

• D TR D P D Q
• D P - D P(e)
• D P(1-e)
• If demand is elastic (egt1),
• P increase ? TR decreases
• P decrease ? TR increases
• If demand is inelastic (elt1),
• P increase ? TR increases
• P decrease ? TR decreases
• If demand is unitary elastic,
• P increase or decrease ? TR unchanged.

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Price Elasticity of Demand

• As P falls from 25 to 12.50, D is elastic, and
  TR rises.
• At 12.50, D is unit elastic and TR stops
  increasing.
• As P falls from 12.50 to 0, D is inelastic, and
  TR decreases.

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Price Elasticity of Demand
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Price Elasticity of Demand

• The elasticity of demand for a good depends on
• The number closeness of substitutes
• The proportion of income spent on the good
• The time elapsed since a price change

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More Elasticities of Demand

• Cross Elasticity of Demand
• measures responsiveness of demand for a good to a
  change in the price of another good.
• exy D quantity demanded for x
• D change in price of y
• exy gt 0 ? substitutes
• exy lt0 ? complements

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More Elasticities of Demand

• Income Elasticity of Demand
• measures how the quantity demanded of a good
  responds to a change in income, ceteris
  paribus. eI D in quantity demanded
• D in income
• eI gt0 ? normal good
• eI gt1 ?luxury good
• eI lt0 ?inferior good

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Price Elasticity of Supply

• A change in demand causes
• A larger change in equilibrium price if supply is
  supply is steeper,
• A smaller change in equilibrium quantity if
  supply is steeper.

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Elasticity of Supply

• Elasticity of supply
• measures the responsiveness of the quantity
  supplied to a change in the price of a good when
  all other influences on selling plans remain the
  same.

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Elasticity of Supply
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Elasticity of Supply

• Factors That Influence the Elasticity of Supply
• Elasticity of supply for inputs
• Substitution possibilities for inputs
• The time frame for supply decisions
• Storage costs