Elasticity chapter 20

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Elasticitychapter 20

• How do I know how much quantity demanded changes
  when price changes???????

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Elasticity

• Def-responsiveness to change
• How responsive is demand to a change in price?
• How responsive is supply to a change in price?
• Depends on
• Number of substitutes
• More substitutes---more elastic
• Income
• Larger of budget---more elastic
• Necessity vs. luxury
• Bread/milk--inelastic
• Time
• Short terminelastic
• Long term-elasticfind substitutes

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How to figure out Elasticity?

• Midpoint Formula
• Change in Qd
• (Q1 Q2) divided by 2
• Divided by
• Change in price
• (p1 p2) divided by 2

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Perfectly Inelastic
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Perfectly Elastic
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Elasticity as a Range

• The higher the price-
• the more elastic
• The lower the
• price
• the less elastic

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Total Revenue Test
Elastic-if price increasestotal revenue
decreases Inelastic-If price increasestotal
revenue increases
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Income Elasticity of Demand

• change in Qd
• change in Income
• Income increases----causes increase in
  Qd---normal good
• Income increasescauses a decrease in Qdinferior
  goods

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Cross Elasticity Of Demand

• change in Qd of product X
• change in Qd of product Y
• If complementsnegative
• If substitutespositive

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Price Elasticity of Supply

• change in Qs
• change in price
• Key issue-time
• Market period
• Short run
• Long run

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PRICE ELASTICITY OF SUPPLY
Immediate Market period
An increase in demand without enough time
to change supply causes an increase in price
P
Sm
Pm
Po
D2
D1
Q
Qo
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PRICE ELASTICITY OF SUPPLY
Short Run
P
Ss
An increase in demand with less intensity supply
use causes...a lower increase in price
Ps
Po
D2
D1
Q
Qo
Qs
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PRICE ELASTICITY OF SUPPLY
Long Run
An increase in demand in the long run
allows greater change causing...
P
SL
PL
Even more elastic response - less price increase
Po
D2
D1
Q
Qo
QL