Unit 3 - Elasticity

1
Unit 3 - Elasticity

• Price Elasticity of Demand
• Price elasticity of demand measures the
  responsiveness of buyers purchasing habits to a
  price change.

Microeconomics
2
Unit 3 - Elasticity

• Price Elasticity of Demand
• Definition
• Ep the percentage change in a products
  quantity demanded divided by the percentage
  change in its price.

Microeconomics
3
Unit 3 - Elasticity

• Price Elasticity of Demand
• Formula
• (change in Qd / average Qd) (change in Pr /
  average Pr)
• Where Qd quantity demanded, and Pr price.

Ep
Microeconomics
4
Unit 3 - Elasticity

• Price Elasticity of Demand
• Example 1
• Lets say that a grocery store observes that at
  2.00 per gallon of milk, buyers purchase 800
  gallons per day. The next week, the grocery
  store increases its price to 3.00 per gallon and
  buyers purchase 700 gallons per day.
• What is the price elasticity of demand for milk?

Microeconomics
5
Unit 3 - Elasticity

• Price Elasticity of Demand
• Example 1 answer
• the change in quantity demanded 100
• the average quantity demanded 750
• the change in price 1
• the average price 2.50
• 100/750 .133 1/2.50 .4

Ep
.3325
Microeconomics
6
Unit 3 - Elasticity

• Price Elasticity of Demand
• Example 1 answerOfficially, the answer is - .
  3325, because the quantity demanded decreased
  (change of -100). However, because price
  elasticity of demand is always negative, we
  ignore the negative sign.

Microeconomics
7
Unit 3 - Elasticity

• Price Elasticity of Demand
• If a products elasticity is less than 1, then
  we say that it is inelastic. If a products
  elasticity is greater than 1, then we say that it
  is elastic. If a products elasticity is equal
  to 1, then we say that it is unit elastic.

Microeconomics
8
A product with a price elasticity of demand equal
to 3.5 is

1. Inelastic
2. Unit elastic
3. Elastic
4. None of the above

9
A product with a price elasticity of demand equal
to 3.5 is

1. Inelastic
2. Unit elastic
3. Elastic
4. None of the above

10
Unit 3 - Elasticity

• Price Elasticity of Demand
• Example 2A movie theatre sells 1,800 tickets
  when it charges a price of 11. After it lowers
  its price to 9, it sells 2,600 tickets.
• What is the price elasticity of demand for
  tickets for this movie theatre?

Microeconomics
11
In the previous example (1,800 and 2,600 tickets,
and price of 11 and 9), what is the price
elasticity of demand?

1. .55
2. 1.818
3. 1.55
4. 2.83
5. 5.151

12
Unit 3 - Elasticity

• Price Elasticity of Demand
• Example 2 answer
• 800/2200 .3636 2/10 .2
• Because the value is greater than 1, movie
  tickets at this theatre are price elastic.

1.818
Ep
Microeconomics
13
Unit 3 - Elasticity

• Price Elasticity of Demand
• Determinants of price elasticity of demand are
• The availability of close substitutes. The more
  substitutes, the greater the elasticity.
• The products expense to the consumer relative to
  her/his income or wealth. The higher the expense,
  the greater the elasticity.
• The period of time under consideration. The
  longer the time period, the greater the
  elasticity.

Microeconomics
14
Unit 3 - Elasticity

• Price Elasticity of Demand
• Price elasticity determinants of gasoline
• The availability of close substitutes. Gasoline
  does not have many substitutes. This makes
  gasoline inelastic.
• The products expense to the consumer relative to
  her/his income or wealth. For many people
  gasoline is a considerable expense. This makes
  gasoline elastic.
• The period of time under consideration. Within a
  short period of time, people cannot change their
  driving behavior much. This makes gasoline
  inelastic when looking at a short-run demand
  curve.
• Overall, especially in the short run, gasoline is
  probably inelastic.

Microeconomics
15
Unit 3 - Elasticity

• Price Elasticity of Demand
• Elasticity and Revenue
• Revenue quantity demanded x price
• If quantity demanded increases by 10, and price
  decreases by 5 (this means that the product is
  elastic), then revenue increases.

Microeconomics
16
If a product is elastic and its price decreases,
then the suppliers total revenue

1. Decreases
2. Increases
3. Stays the same
4. None of the above

17
If a product is inelastic and its price
decreases, then the suppliers total revenue

1. Decreases
2. Increases
3. Stays the same
4. None of the above

18
If a product is unit elastic and its price
decreases, then the suppliers total revenue

1. Decreases
2. Increases
3. Stays the same
4. None of the above

19
Unit 3 - Elasticity

• Price Elasticity of Demand
• Elasticity and Revenue Summary
• If a product is elastic and price increases, then
  revenue decreases.
• If a product is inelastic and price increases,
  then revenue increases.
• If a product is elastic and price decreases, then
  revenue increases.
• If a product is inelastic and price decreases,
  then revenue decreases.
• If a product is unit elastic and price changes,
  then revenue stays the same.

Microeconomics
20
When you graph a demand curve, you notice that a
flatter (closer to horizontal) demand curve is
associated with a

1. Higher price elasticity of demand
2. Lower price elasticity of demand
3. Perfectly inelastic demand situation
4. None of the above

21
Unit 3 - Elasticity
Price
D1 (inelastic demand curve)
9.00
D2 (elastic demand curve)
8.00
60
68
100
Quantity
22
Unit 3 - Elasticity

• Elasticity and Competition
• A perfectly competitive firm faces a demand
  curve which is perfectly elastic (horizontal).
• The more elastic the product, the flatter the
  curve.

Microeconomics
23
Unit 3 - Elasticity
Price
D1 (Perfectly Elastic Demand Curve)
9.00
D2 (Perfectly Inelastic Demand Curve)
60
Quantity
24
Unit 3 - Elasticity

• Income Elasticity of Demand
• Income elasticity of measures the responsiveness
  of buyers purchasing habits in response to an
  income change.

Microeconomics
25
Unit 3 - Elasticity

• Income Elasticity of Demand
• Definition
• Ei the percentage change in a products
  quantity demanded divided by the percentage
  change in buyers incomes.
• The value can be positive (normal good) or
  negative (inferior good).

Microeconomics
26
Unit 3 - Elasticity

• Income Elasticity of Demand
• Formula
• (change in Qd / average Qd) (change in Y /
  average Y)
• Where Qd quantity demanded, and Y income.

Ei
Microeconomics
27
Unit 3 - Elasticity

• Cross Price Elasticity of Demand
• The price change of a substitute or
  complementary product affects the quantity
  demanded of the other substitute or complementary
  product.
• Substitutes have a positive cross price
  elasticity of demand. Complements have a
  negative cross price elasticity of demand.

Microeconomics
28
Unit 3 - Elasticity

• Cross Price Elasticity of Demand
• The formula for cross price elasticity of demand
  is
• the change in the quantity demanded
  of product A
• the change in the price of related product
  B

Ecp
Microeconomics