Class Slides 3

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Class Slides 3

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

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