Elasticity of

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• Elasticity of
• Demand Supply

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P
D1
P1
P2
Q
Q1
Q2
3
P
Price Elasticity Of Demand
D1
D2
P1
P2
Q
Q1
Q2
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Price Elasticity of Demand

• The measurement of the responsiveness, or
  sensitivity, of consumers to a change in the
  price of a product.

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Price Elasticity of Demand

• Elastic demand Buyers are highly responsive to
  a price change.
• - Examples beef, restaurant meals
• Inelastic demand Buyers are very unresponsive
  to a price change.
• - Examples cigarettes, milk

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P
Inelastic Demand
P1
P2
Q
Q1
Q2
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P
Elastic Demand
P1
P2
Q
Q1
Q2
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Price Elasticity of Demand Coefficient (Ed)
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Price Elasticity of Demand Coefficient (Ed)
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Calculate Ed
0.20
0.38
0.64
1.00
1.57
2.60
5.00
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Coefficient of Elasticity (Ed)
?
Elastic (relatively elastic)
?
Inelastic (relatively inelastic)
?
Unit Elastic
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Calculate Ed
0.20
0.38
Inelastic
0.64
1.00
1.57
2.60
5.00
13
Calculate Ed
0.20
0.38
0.64
1.00
1.57
2.60
Elastic
5.00
14
Calculate Ed
0.20
0.38
0.64
1.00
Unit elastic
1.57
2.60
5.00
15
Unit Elastic Ed 1
Inelastic Ed lt 1
Price
Elastic Ed gt 1
Q

• Graphical Analysis
• Elasticity varies with price range
• Slope does not measure elasticity

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Perfectly Inelastic Demand
P
D1

• Insulin (diabetic)
• Heroin (addict)

Q
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Perfectly Elastic Demand
P

• The demand for a farmers crop
• Wheat
• Corn

D1
Q
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Total Revenue Test

• Total revenue (TR) The total amount the seller
  receives from the sale of Q units of a product.
• TR P x Q

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Total Revenue
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Total Revenue Test
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Total Revenue Test
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Total Revenue Test
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Total Revenue
Inelastic
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Total Revenue
Elastic
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Total Revenue
Unit Elastic
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Total Revenue - graphically...
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TR
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Unit Elastic Ed 1
Inelastic Ed lt 1
Price
Elastic Ed gt 1
Q
Total Revenue
TR
Q
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Determinants of Price Elasticity of Demand

• Are substitutes available?
• - Yes ? elastic No ? inelastic
• Is the price a large proportion of income?
• - Yes ? elastic No ? inelastic
• Is the good a luxury or necessity?
• - Luxury ? elastic Necessity ? inelastic
• Can the purchase be delayed?
• - Yes ? elastic No ? inelastic

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Applications of Price Elasticity of Demand

• Large crop yields (bumper crops)
• Highly inelastic demand
• Increased output ? lower price ? lower total
  revenue
• Excise taxes (gasoline, tobacco, alcohol...)
• Highly inelastic demand
• Tax ? higher price ? higher tax revenues
• Illegal drugs
• Minimum wage

Pg. 120
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Price Elasticity of Supply

• Elastic supply Producers are relatively
  responsive to price changes.
• Inelastic supply Producers are relatively
  insensitive to price changes.

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Price Elasticity of Supply Coefficient (Es)
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Calculate Es

• P1 4
• P2 6
• Qs1 10 units
• Qs2 14 units

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Answer
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Elasticity of Supply

• Es lt 1? inelastic
• Es gt 1? elastic
• Es 1? unit elastic

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Determinant of Price Elasticity of Supply

• The amount of time available for producers to
  respond to a price change.
• Market period the time following a price change
  in which suppliers cannot change quantity
  supplied.
• - Short run some resources are fixed.
• - Supply may be inelastic
• - Long run no resources are fixed.
• - Supply is elastic

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Cross-Price Elasticity of Demand

• Measures the effect a change in the price of a
  related good (Y) has on the quantity demanded of
  good (X).

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Cross-Price Elasticity of Demand

• EXY gt 0 ? substitute goods
• EXY lt 0 ? complementary goods
• EXY 0 (or near-zero) ? unrelated goods

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Income Elasticity of Demand

• Measures the effect changes in income have on
  quantity demanded

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Income Elasticity of Demand

• Ei gt 0 ?? normal good
• Ei lt 0 ?? inferior good

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NextCh. 8

• Consumer Behavior and Utility Maximization