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# Bec doms ppt on the elasticity of demand

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Bec doms ppt on the elasticity of demand

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• ### Bec doms ppt on the elasticity of demand

1. 1. The Elasticity of Demand
2. 2. The Concept of Elasticity <ul><li>Elasticity is a measure of the responsiveness of one variable to another. </li></ul><ul><li>The greater the elasticity, the greater the responsiveness. </li></ul>
3. 3. Laugher Curve <ul><li>Q. What’s the difference between an economist and a befuddled old man with Alzheimer’s? </li></ul><ul><li>A. The economist is the one with a calculator. </li></ul>
4. 4. The Concept of Elasticity <ul><li>Elasticity is a measure of the responsiveness of one variable to another. </li></ul><ul><li>The greater the elasticity, the greater the responsiveness. </li></ul>
5. 5. Price Elasticity <ul><li>The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. </li></ul>
6. 6. Sign of Price Elasticity <ul><li>According to the law of demand, whenever the price rises, the quantity demanded falls. Thus the price elasticity of demand is always negative. </li></ul><ul><li>Because it is always negative, economists usually state the value without the sign. </li></ul>
7. 7. What Information Price Elasticity Provides <ul><li>Price elasticity of demand and supply gives the exact quantity response to a change in price. </li></ul>
8. 8. Classifying Demand and Supply as Elastic or Inelastic <ul><li>Demand is elastic if the percentage change in quantity is greater than the percentage change in price. </li></ul><ul><li>E > 1 </li></ul>
9. 9. Classifying Demand and Supply as Elastic or Inelastic <ul><li>Demand is inelastic if the percentage change in quantity is less than the percentage change in price. </li></ul>E < 1
10. 10. Elastic Demand <ul><li>Elastic Demand means that quantity changes by a greater percentage than the percentage change in price. </li></ul>
11. 11. Inelastic Demand <ul><li>Inelastic Demand means that quantity doesn't change much with a change in price. </li></ul>
12. 12. Defining elasticities <ul><li>When price elasticity is between zero and -1 we say demand is inelastic . </li></ul><ul><li>When price elasticity is between -1 and - infinity, we say demand is elastic . </li></ul><ul><li>When price elasticity is -1, we say demand is unit elastic . </li></ul>
13. 13. Elasticity Is Independent of Units <ul><li>Percentages allow us to have a measure of responsiveness that is independent of units. </li></ul><ul><li>This makes comparisons of responsiveness of different goods easier. </li></ul>
14. 14. Calculating Elasticities <ul><li>To determine elasticity divide the percentage change in quantity by the percentage change in price. </li></ul>
15. 15. The End-Point Problem <ul><li>The end-point problem – the percentage change differs depending on whether you view the change as a rise or a decline in price. </li></ul>
16. 16. The End-Point Problem <ul><li>Economists use the average of the end points to calculate the percentage change. </li></ul>
17. 17. Graphs of Elasticities Elasticity of demand between A and B = 1.27 Price Quantity of software (in hundred thousands) \$26 24 22 20 18 16 14 0 D B A 10 12 14 C (midpoint)
18. 18. Calculating Elasticities: Price elasticity of Demand D P Q What is the price elasticity of demand between A and B? \$20 10 \$26 14 Midpoint B A C 12 \$23 7-18 E D = %ΔQ %ΔP Q 2 –Q 1 ½(Q 2 +Q 1 ) P 2 –P 1 ½(P 2 +P 1 ) = = 10–14 ½(10+14) 26–20 ½(26+20) -.33 .26 = 1.27 =
19. 19. Price Elasticity: Supply <ul><li>Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in </li></ul><ul><li>This tells us exactly how quantity supplied responds to a change in price </li></ul>E S = <ul><li>Elasticity is independent of units </li></ul>% change in Quantity Supplied % change in Price 7-19
20. 20. Price Elasticity: Supply <ul><li>Supply is elastic if the percentage change in quantity is greater than the percentage change in price </li></ul>Elastic supply is when E S > 1 <ul><li>Supply is inelastic if the percentage change in quantity is less than the percentage change in price </li></ul>Inelastic supply is when E S < 1 7-20
21. 21. Calculating Elasticities: Price elasticity of Supply P Q What is the price elasticity of supply between A and B? \$4.50 476 \$5.00 485 B A E S = %ΔQ %ΔP S 7-21 Q 2 –Q 1 ½(Q 2 +Q 1 ) P 2 –P 1 ½(P 2 +P 1 ) = = 485–476 ½(485+476) 5–4.50 ½(5+4.50) Midpoint C 480.5 \$4.75 0.0187 0.105 = 0.18 =
22. 22. Graphs of Elasticities Elasticity of supply between A and B = 0.18 Wage per hour Quantity of workers \$6.00 5.50 5.00 4.50 4.00 3.50 3.00 0 C B A 470 (midpoint) 480 490
23. 23. Calculating Elasticity
24. 24. Calculating Elasticity of Demand Between Two Points Price Quantity of software (in hundred thousands) \$26 24 22 20 18 16 14 0 Demand B A 10 12 14 C midpoint Elasticity of demand between A and B:
25. 25. Calculating Elasticity of Supply Between Two Points Wage per hour Quantity of workers \$6.00 5.50 5.00 4.50 4.00 3.50 3.00 0 C B A 470 480 490 Elasticity of supply between A and B:
26. 26. Calculating Elasticity at a Point <ul><li>Let us now turn to a method of calculating the elasticity at a specific point, rather than over a range or an arc. </li></ul>
27. 27. Calculating Elasticity at a Point <ul><li>To calculate elasticity at a point, determine a range around that point and calculate the arc elasticity. </li></ul>
28. 28. Calculating Elasticity at a Point Price Quantity \$10 9 8 7 6 5 4 3 2 1 C B A 24 40 28 20
29. 29. Calculating Elasticity at a Point To calculate elasticity at a point determine a range around that point and calculate the arc elasticity. Price Quantity \$10 9 8 7 6 5 4 3 2 1 C B A 24 40 28 20
30. 30. Elasticity and Demand Curves <ul><li>Two important points to consider: </li></ul><ul><ul><li>Elasticity is related (but is not the same as) slope. </li></ul></ul><ul><ul><li>Elasticity changes along straight-line demand and supply curves. </li></ul></ul>
31. 31. Calculating Elasticity at a Point 6 12 18 30 36 42 48 Price Quantity 8 7 6 5 4 3 2 1 \$10 9 24 60 54 Supply E A = 2.33 E B = 0.11 Demand E C = 0.75 E D = 0.86 A D B C
32. 32. Elasticity and Demand Curves <ul><li>Two important points to consider: </li></ul><ul><ul><li>Elasticity is related (but is not the same as) slope. </li></ul></ul><ul><ul><li>Elasticity changes along straight-line demand and supply curves. </li></ul></ul>
33. 33. Elasticity Is Not the Same as Slope <ul><li>The steeper the curve at a given point, the less elastic is supply or demand. </li></ul><ul><li>There are two limiting examples of this. </li></ul>
34. 34. Elasticity Is Not the Same as Slope <ul><li>When the curves are flat, we call the curves perfectly elastic. </li></ul>The quantity changes enormously in response to a proportional change in price ( E =  ).
35. 35. Elasticity Is Not the Same as Slope <ul><li>When the curves are vertical, we call the curves perfectly inelastic. </li></ul>The quantity does not change at all in response to an enormous proportional change in price ( E = 0 ).
36. 36. Perfectly Inelastic Demand Curve Perfectly inelastic demand curve Price 0 Quantity
37. 37. Perfectly Elastic Demand Curve Perfectly elastic demand curve Price 0 Quantity
38. 38. Demand Curve Shapes and Elasticity <ul><li>Perfectly Elastic Demand Curve </li></ul><ul><ul><li>The demand curve is horizontal, any change in price can and will cause consumers to change their consumption. </li></ul></ul><ul><li>Perfectly Inelastic Demand Curve </li></ul><ul><ul><li>The demand curve is vertical, the quantity demanded is totally unresponsive to the price. Changes in price have no effect on consumer demand. </li></ul></ul><ul><li>In between the two extreme shapes of demand curves are the demand curves for most products. </li></ul>
39. 39. Demand Curve Shapes and Elasticity
40. 40. Elasticity Changes Along Straight-Line Curves <ul><li>Elasticity is not the same as slope. </li></ul><ul><li>Elasticity changes along straight line supply and demand curves–slope does not. </li></ul>
41. 41. Elasticity Along a Demand Curve Price \$10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Quantity Elasticity declines along demand curve as we move toward the quantity axis E d = 1 E d = ∞ E d = 0 E d < 1 E d > 1
42. 42. The Price Elasticity of Demand Along a Straight-line Demand Curve
43. 43. Substitution and Elasticity <ul><li>As a general rule, the more substitutes a good has, the more elastic is its supply and demand. </li></ul>
44. 44. Substitution and Demand <ul><li>The less a good is a necessity, the more elastic its demand curve. </li></ul>Necessities tend to have fewer substitutes than do luxuries.
45. 45. Substitution and Demand <ul><li>Demand for goods that represent a large proportion of one's budget are more elastic than demand for goods that represent a small proportion of one's budget. </li></ul>
46. 46. Substitution and Demand <ul><li>Goods that cost very little relative to your total expenditures are not worth spending a lot of time figuring out if there is a good substitute. </li></ul>It is worth spending a lot of time looking for substitutes for goods that take a large portion of one’s income.
47. 47. Substitution and Demand <ul><li>The larger the time interval considered, or the longer the run, the more elastic is the good’s demand curve. </li></ul><ul><ul><li>There are more substitutes in the long run than in the short run. </li></ul></ul><ul><ul><li>The long run provides more options for change. </li></ul></ul>
48. 48. Determinants of the Price Elasticity of Demand <ul><li>The degree to which the price elasticity of demand is inelastic or elastic depends on: </li></ul><ul><ul><li>How many substitutes there are </li></ul></ul><ul><ul><li>How well a substitute can replace the good or service under consideration </li></ul></ul><ul><ul><li>The importance of the product in the consumer’s total budget </li></ul></ul><ul><ul><li>The time period under consideration </li></ul></ul>