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Ch. 5 Elasticity and Its Application<br />By Sophia TC and Kristin Soreide<br />
Elasticity<br />Elasticity measures  how buyers and sellers respond to changes in market conditions<br />If a good is inel...
Perfectly inelastic demand-Quantity demanded is the same regardless of price<br />Perfectly inelastic supply- Quantity sup...
Price Elasticity of Demand<br />Measures how much the quantity demanded of a good responds to a change in the price of tha...
What determines PEOD?<br />Availability of close substitutes<br />Necessities vs. Luxuries<br /> Definition of the Market<...
Continue of PEOD…<br />EX. Eggs have no close substitute where as butter has many substitutes(margarine..etc); therefore t...
Mid Point Method<br />The Mid Point method is used to calculate the price elasticity of demand and prevents from making sm...
Total Revenue<br />Information<br />The amount paid by buyers and received by sellers<br />Computed as PRICE of the good x...
Income Elasticity Of Demand<br />A measure of how much the quantity demanded of a good responds to a change in consumer in...
Cross Price Elasticity of Demand<br />A measure of how much the quantity demanded of one good responds to a change in the ...
Price Elasticity of Supply<br />A measure of how much the quantity supplied of a good responds to a change in the price of...
For example…<br />An increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produ...
Determinants of PEOS<br />Flexibility of sellers<br />Goods that are somewhat fixed in supply<br />Time Horizons<br />Beac...
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Elasticity and its Application (By Kristin and Sophia)

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Transcript of "Elasticity and its Application (By Kristin and Sophia)"

  1. 1. Ch. 5 Elasticity and Its Application<br />By Sophia TC and Kristin Soreide<br />
  2. 2. Elasticity<br />Elasticity measures how buyers and sellers respond to changes in market conditions<br />If a good is inelastic, the quantity demanded responds only slightly to a change in price<br />If a good is elastic, the quantity demanded responds substantially to a change in price<br />
  3. 3. Perfectly inelastic demand-Quantity demanded is the same regardless of price<br />Perfectly inelastic supply- Quantity supplied is the same regardless of price<br />Perfectly elastic demand- Very small changes in price lead to very large changes in quantity demanded<br />Perfectly elastic supply- Very small changes in price lead to very large changes in quantity supplied<br />
  4. 4. Price Elasticity of Demand<br />Measures how much the quantity demanded of a good responds to a change in the price of that good<br />%change in QD/ % change in P<br />Shows how willing consumers are to move away from a good as its price rises<br />
  5. 5. What determines PEOD?<br />Availability of close substitutes<br />Necessities vs. Luxuries<br /> Definition of the Market<br />Time Horizon<br />More substitutes have higher elasticity of its demand<br />Narrow vs. Broad markets<br />Long vs. Short period of time<br />
  6. 6. Continue of PEOD…<br />EX. Eggs have no close substitute where as butter has many substitutes(margarine..etc); therefore the demand for eggs is less elastic than demand for butter<br />Necessities are more inelastic than luxuries which are more elastic because people can go without having luxuries for a certain period of time, but it is hard to go by without necessities<br />Narrowly defined markets(bean burritos) have more elastic demand than broadly defined markets(food)<br />Goods have more elastic demand over longer time horizons<br />EX. When price of gas rises, the QD falls only slightly in the first few months but over time people find different ways of transportation and QD falls substantially<br />
  7. 7. Mid Point Method<br />The Mid Point method is used to calculate the price elasticity of demand and prevents from making small mistakes between two points<br />Gives the same answer regardless of the direction change<br /> Elasticity &gt;1- elastic<br />Elasticity&lt;1- inelastic<br />Elasticity=1- unit elasticity<br />Ex.<br />(Q2-Q1)/[(Q2+Q1)/2]<br />(P2-P1)/[(P2+P1)/2]<br />
  8. 8. Total Revenue<br />Information<br />The amount paid by buyers and received by sellers<br />Computed as PRICE of the good x QUANTITY of the good<br />Changes in total revenue depend on elasticity of demand<br />GRAPH<br />
  9. 9. Income Elasticity Of Demand<br />A measure of how much the quantity demanded of a good responds to a change in consumer income<br />% change in quantity demanded<br />% change in income<br />Normal goods: positive elasticity <br />Most goods (higher income raises quantity demanded)<br />Inferior goods: negative elasticity <br />Ex. Bus rides ( higher income lowers the quantity demanded)<br />
  10. 10. Cross Price Elasticity of Demand<br />A measure of how much the quantity demanded of one good responds to a change in the price of another good<br />% change in quantity demanded (1st good)<br />% change in price (2nd good)<br />Substitutes and complements affect whether the cross price elasticity is a positive or negative number<br />Substitutes= positive elasticity<br />Complements= negative elasticity<br />
  11. 11. Price Elasticity of Supply<br />A measure of how much the quantity supplied of a good responds to a change in the price of that good<br /> % Change quantity supplied<br /> % Change in price<br />
  12. 12. For example…<br />An increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce 9,000 to 11,000 gallons<br />(3.15-2.85)/3.00x100 = 10 percent<br />(11,000-9,000)/10,000x100= 20 percent<br />Price elasticity of supply= 20 percent/ 10 percent =2.0<br />
  13. 13. Determinants of PEOS<br />Flexibility of sellers<br />Goods that are somewhat fixed in supply<br />Time Horizons<br />Beach fronts (inelastic) vs. Manufactured goods (elastic) – harder to supply more beach land<br />Supply is usually more inelastic in the short run than in the long run<br />
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