Elastcity of demand

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Elasticity is a measure of the responsiveness of one variable to another.
The greater the elasticity, the greater the responsiveness.

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Elastcity of demand

  1. 1. Prepared by: Milan Padariya
  2. 2. Elasticity is a measure of the responsiveness of one variable to another.  The greater the elasticity, the greater the responsiveness. 
  3. 3. Q. What’s the difference between an economist and a befuddled old man with Alzheimer’s? A. The economist is the one with a calculator.
  4. 4. Elasticity is a measure of the responsiveness of one variable to another.  The greater the elasticity, the greater the responsiveness. 
  5. 5.  The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.
  6. 6.  According to the law of demand, whenever the price rises, the quantity demanded falls. Thus the price elasticity of demand is always negative.  Because it is always negative, economists usually state the value without the sign.
  7. 7.  Price elasticity of demand and supply gives the exact quantity response to a change in price.
  8. 8.  Demand is elastic if the percentage change in quantity is greater than the percentage change in price. E > 1
  9. 9.  Demand is inelastic if the percentage change in quantity is less than the percentage change in price. E<1
  10. 10.  Elastic Demand means that quantity changes by a greater percentage than the percentage change in price.
  11. 11.  Inelastic Demand means that quantity doesn't change much with a change in price.
  12. 12.  When price elasticity is between zero and -1 we say demand is inelastic .  When price elasticity is between -1 and - infinity, we say demand is elastic .  When price elasticity is -1, we say demand is unit elastic .
  13. 13. Percentages allow us to have a measure of responsiveness that is independent of units.  This makes comparisons of responsiveness of different goods easier. 
  14. 14.  To determine elasticity divide the percentage change in quantity by the percentage change in price.
  15. 15.  The end-point problem – the percentage change differs depending on whether you view the change as a rise or a decline in price.
  16. 16.  Economists use the average of the end points to calculate the percentage change.
  17. 17. Price $26 24 22 20 18 16 14 0 B C (midpoint) A D Elasticity of demand between A and B = 1.27 10 12 14 Quantity of software (in hundred thousands)
  18. 18. What is the price elasticity of demand between A and B? P $26 $23 $20 B Midpoint C A 10 12 14 Q2–Q1 ½(Q2+Q1) %ΔQ ED = %ΔP = P2–P1 ½(P2+P1) 10–14 ½(10+14) -.33 = 26–20 = .26 = 1.27 ½(26+20) D Q 7-18
  19. 19.  Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in ES = % change in Quantity Supplied % change in Price • This tells us exactly how quantity supplied responds to a change in price • Elasticity is independent of units 7-19
  20. 20.  Supply is elastic if the percentage change in quantity is greater than the percentage change in price Elastic supply is when ES > 1 • Supply is inelastic if the percentage change in quantity is less than the percentage change in price Inelastic supply is when ES < 1 7-20
  21. 21. What is the price elasticity of supply between A and B? P S $5.00 B Midpoint C $4.75 $4.50 A 476 480.5 485 Q2–Q1 %ΔQ ½(Q2+Q1) ES = %ΔP = P2–P1 ½(P2+P1) 485–476 ½(485+476) 0.0187 0.18 = 5–4.50 = 0.105 = ½(5+4.50) Q 7-21
  22. 22. Wage per hour $6.00 5.50 5.00 4.50 4.00 3.50 3.00 0 A B C (midpoint) Elasticity of supply between A and B = 0.18 470 480 490 Quantity of workers
  23. 23. Q 2 − Q1 %∆ Q (Q 1 + Q 2 ) E= = P2 − P1 %∆ P 1 2 (P1 + P2 ) 1 2
  24. 24. $26 B Price 24 22 20 18 16 10 − 14 midpoint (14 + 10) Elasticity of demand between A and B: −4 − .33 ED = = 12 = = 1.27 26 − 20 6 .26 1 23 2 (26 + 20) 1 2 %∆ Q E= %∆P C A Demand 14 0 10 12 14 Quantity of software (in hundred thousands)
  25. 25. Wage per hour $6.00 5.50 5.00 4.50 E 4.00 = 3.50 3.00 S 0 A 485 − 475 10 1 (485 + 475 ) .021 2 = 480 = = .2 5 − 4.50 .50 .105 1 4.75 2 (5 + 4.50) C B 470 480 490 Quantity of workers Elasticity of supply between A and B: E= %∆ Q %∆ P
  26. 26.  Let us now turn to a method of calculating the elasticity at a specific point, rather than over a range or an arc.
  27. 27.  To calculate elasticity at a point, determine a range around that point and calculate the arc elasticity.
  28. 28. Price $10 9 8 7 6 5 4 3 2 1 C A B 20 24 28 40 Quantity
  29. 29. Price $10 9 8 7 6 5 4 3 2 1 To calculate elasticity at a point determine a range around that point and calculate the arc elasticity. C E at A = 1 2 A 28 − 20 8 (28 + 20) 24 .33 = = = .66 5−3 2 .5 1 4 2 (5 + 3) B 20 24 28 Quantity 40
  30. 30.  Two important points to consider: ◦ Elasticity is related (but is not the same as) slope. ◦ Elasticity changes along straight-line demand and supply curves.
  31. 31. Price $10 9 8 7 6 5 4 3 2 1 Demand A Supply EA = 2.33 D C E = 0.75 C 6 ED = 0.86 EB = 0.11 B 12 18 24 30 36 42 48 54 60 Quantity
  32. 32.  Two important points to consider: ◦ Elasticity is related (but is not the same as) slope. ◦ Elasticity changes along straight-line demand and supply curves.
  33. 33. The steeper the curve at a given point, the less elastic is supply or demand.  There are two limiting examples of this. 
  34. 34.  When the curves are flat, we call the curves perfectly elastic. • The quantity changes enormously in response to a proportional change in price (E = ∞).
  35. 35.  When the curves are vertical, we call the curves perfectly inelastic. • The quantity does not change at all in response to an enormous proportional change in price (E = 0).
  36. 36. Price Perfectly inelastic demand curve 0 Quantity
  37. 37. Price 0 Perfectly elastic demand curve Quantity
  38. 38.  Perfectly Elastic Demand Curve ◦ The demand curve is horizontal, any change in price can and will cause consumers to change their consumption.  Perfectly Inelastic Demand Curve ◦ The demand curve is vertical, the quantity demanded is totally unresponsive to the price. Changes in price have no effect on consumer demand.  In between the two extreme shapes of demand curves are the demand curves for most products.
  39. 39. Elasticity is not the same as slope.  Elasticity changes along straight line supply and demand curves–slope does not. 
  40. 40. Ed = ∞ $10 9 8 7 6 5 4 3 2 1 Elasticity declines along demand curve as we move toward the quantity axis Price Ed > 1 0 Ed = 1 Ed < 1 Ed = 0 1 2 3 4 5 6 7 8 9 10 Quantity
  41. 41. The Price Elasticity of Demand Along a Straight-line Demand Curve
  42. 42.  As a general rule, the more substitutes a good has, the more elastic is its supply and demand.
  43. 43.  The less a good is a necessity, the more elastic its demand curve. • Necessities tend to have fewer substitutes than do luxuries.
  44. 44.  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.
  45. 45.  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. • It is worth spending a lot of time looking for substitutes for goods that take a large portion of one’s income.
  46. 46.  The larger the time interval considered, or the longer the run, the more elastic is the good’s demand curve. ◦ There are more substitutes in the long run than in the short run. ◦ The long run provides more options for change.
  47. 47.  The degree to which the price elasticity of demand is inelastic or elastic depends on: ◦ How many substitutes there are ◦ How well a substitute can replace the good or service under consideration ◦ The importance of the product in the consumer’s total budget ◦ The time period under consideration

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