Tells us percentage change in quantity demanded for each 1% increase in price
Ask student to draw the graph for extreme case.
Do not consider the cost side, only the income earned for firms
Graphically, at any point on a demand curve sellers’ total revenue (buyers’ total expenditure) is the area of a rectangle . Width equal to quantity demanded .Height equal to price
Another equation is helpful to understand the concept: (dq/dp ) * (p/q)
Example: pepsi and cola
Example: corn in Iowa compared with corn in US Example: Pepsi compared with soda drink
Example: salt, milk, eggs, gas, medical care and so on – necessity diamond, tourism to China and so on – luxurious
Necessity is not meaning “necessary to survive”. Cigarette is an example. It is inelastic demanded.
While the sign of the cross-price elasticity helps us distinguish
Transcript
1.
Overview
Elasticity calculation and interpretation
Difference between elastic, inelastic, and unitary elastic demand/supply
Prediction on revenue change in response to a change in price
Elasticity varies as one moves along a straight-line demand curve
Elasticity approach improves on the problems with rate of change
By comparing percentage change in quantity demanded with percentage change in price
Price elasticity of demand ( )for a good is percentage change in quantity demanded divided by percentage change in price
always be a negative number
Use the midpoint
Price elasticity of demand tells us percentage change in quantity demanded caused by a 1% rise in price as we move along a demand curve from one point to another
4.
Part 1: Price Elasticity of Demand - Calculation
Base value for percentage changes in price or quantity is always midway between initial value and new value
Denominator
- Define the percentage change in price from any value P 0 to any other value P 1 as
Numerator:
When quantity demanded changes from Q 0 to Q 1 , percentage change is calculated as
As we move upward and leftward by equal distances, percentage change in quantity rises
Percentage change in price falls
Elasticity of demand varies along a straight-line demand curve
Demand becomes more elastic as we move upward and leftward
17.
1 2 3 D Quantity Price and since equal quantity decreases (horizontal arrows) are larger and larger percentage decreases . . . Since equal peso increases (vertical arrows) are smaller and smaller percentage increases . . . demand becomes more and more elastic as we move leftward and upward along a straight-line demand curve.
18.
PRICE QUANTITY As P increases, Q falls, elasticity gets bigger | E D | > 1 elastic | E D | = 1 Unit elastic | E D | < 1 inelastic 25 5
19.
Small Summary Inelastic Demand Unitary Elastic Demand Elastic Demand Definition |E D | <1 |E D | =1 |E D | >1 Total Revenue Same direction as price change Does not change with price change Opposite direction from price Straight Line Demand Curve Lower segment Middle point Upper segment
20.
What Affects Elasticity? -- 1. Availability of Substitutes
Demand is more elastic
If close substitutes are easy to find and buyers can cut back on purchases of the good in question
Demand is less elastic
If close substitutes are difficult to find and buyers can not cut back on purchases of the good in question
21.
What Affects Elasticity? -- 2. Narrowness of Market
More narrowly we define a good, easier it is to find substitutes
More elastic is demand for the good
More broadly we define a good
Harder it is to find substitutes and the less elastic is demand for the good
Different things are assumed constant when we use a narrow definition compared with a broader definition
22.
What Affects Elasticity? -- 3.Necessities vs. Luxuries
The more “necessary” we regard an item, the harder it is to find a substitute
Expect it to be less price elastic
The less “necessary” (luxurious) we regard an item, the easier it can be substituted
Perfectly inelastic supply curve is a vertical line
Many markets display almost completely inelastic supply curves over very short periods of time
Perfectly elastic supply curve is a horizontal line
36.
: Extreme Cases of Supply S P 1 P 2 S (a) Quantity per Period Price per Unit (b) Quantity per Period Price per Unit Perfectly Inelastic Supply Perfectly Elastic Supply
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