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Class Slides 3
 

Class Slides 3

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    Class Slides 3 Class Slides 3 Presentation Transcript

    • ELASTICITY
    • Price elasticity of demand
      • • This is a measure of the responsiveness of quantity demanded relative to a given price change.
      • • The proportional change in the quantity demanded relative to a proportional change in price.
    • Elasticity and the demand curve
      • Three general ranges of elasticity
      • • inelastic – percentage in quantity demanded is less than percentage change in price
      • • unit elastic – percentage change in quantity demanded equals percentage change in price
      • • elastic – percentage change in quantity demanded exceeds percentage change in price.
    • Demand curves of different elasticities (less elastic)
    • Demand curves of different elasticities (more elastic)
    • Perfectly (in)elastic
    • Constant unit elasticity
    • Determinants of the price elasticity of demand
      • Availability of substitutes. Demand for goods with no substitute is less elastic.
      • A matter of time - week/month/year
    • Price elasticity and total revenue
      • total revenue (or expenditure) is TR = P x Q
      • What happens to TR when price decreases?
      • • elastic demand – TR rises when price falls
      • • unit elastic – TR is unchanged when price falls
      • • inelastic demand – TR decreases when price falls .
    • Demand and price elasticity, and total revenue
    • Summary of price elasticity of demand
    • Price elasticity of supply
      • • a measure of the responsiveness of quantity supplied to a price change
      • • calculated as the percentage change in quantity supplied divided by the percentage change in price
    • Categories of supply elasticity
      • • Perfectly elastic supply
      • - the horizontal supply curve: elasticity = infinity
      • • Perfectly inelastic supply
      • - the vertical supply curve: elasticity = 0
      • • Unit elasticity of supply
      • - a straight-line supply curve through the origin:elasticity = 1
    • Three constant elasticity of supply curves
    • Determinants of supply elasticity
      • • costliness of the good in production
      • • time - Over time, the elasticity of supply tends to increase due to adjustments that can be made in the production process.
      • - The longer the time period, the more elastic the supply.
    • Other elasticity measures
      • • ‘ Income elasticity of demand’ measures the responsiveness of demand to changes in consumer income.
      • Income elasticity is positive for normal goods and negative for inferior goods.