Micro 7

2. Microeconomics
Lecture 7
Elasticity

3. Questions?

4. ELASTICITY EQUATION BENCHMARK
Price Elasticity
of Demand
Cross-Price
Elasticity
Income
Elasticity
Price Elasticity
of Supply
Midpoint
Formula
Inelastic | Elastic
1
Compliments | Substitutes
0
Inferior | Normal | Luxury
0 1
Inelastic | Elastic
1
%∆QD
%∆P
%∆QS
%∆P
%∆QD1
%∆P2
%∆QD
%∆I
∆Q
∆PQ
Px

5. Economics
The study of how
humans create value for
one another

6. Elasticity
If I change one thing does
another thing also change?

7. Change
one
variable
What
happens to
other variable

8. Elasticity
A measure of how much
one economic variable
responds to changes in
another economic variable

9. Price Elasticity of
Demand
What happens if I
change prices?

10. Price Elasticity of Demand
%
%
QD
P
Percentage Change in Quantity
Demanded
Percentage Change in Price

11. Midpoint Formula
Delta Q
over
Q Bar
Delta P
over
P Bar
Q
Q
P
P
Trick: Flip denominator and multiply
X =

12. Cross Price
What happens to one
product if I raise or
lower prices on another
product?

13. Cross-Price
Elasticity of Demand
Percentage Change in Quantity
Demanded of one good
Percentage Change in Price
of another good
%
%
QD
P
1
2

14. Cross-Price
Elasticity of Demand
0
SubstitutesCompliments
<0 >0
1. Calculate Elasticity
2. Compare to benchmark of 0

15. %
%
QD1
P2
35%
50%
=.7 >0
Substitutes

16. %
%
QD1
P2
-40%
50%
=-.8 <0
Compliments

17. Cross-Price
Elasticity of Demand
0
SubstitutesCompliments
<0 >0
%
%
QD
P
1
2

18. Income Elasticity
What happens to one
demand if my income
goes up or down?

19. Income Elasticity
Normal
Inferior
Luxury

20. Percentage Change in
Quantity Demanded
Percentage Change in Income
Income
Elasticity of Demand
%
%
QD
I

21. Income
Elasticity of Demand
0
LuxuryInferior
<0 >1
1. Calculate Elasticity
2. Compare to benchmark of 0 and 1
1
Normal

22. %
%
QD
I
10%
20%
=.5
>0
<1
Normal

23. %
%
QD
I
-50%
20%
=-2.5 <0
Inferior

24. %
%
QD
I
100%
20%
= 5 >1
Luxury

25. Income
Elasticity of Demand
0
LuxuryInferior
<0 >11
Normal
%
%
QD
I

26. Elasticity of
Supply
What happens if I raise
or lower prices?

27. Price Elasticity of Supply
%
%
QS
P
Percentage Change in
Quantity Supplied
Percentage Change in Price

28. Price Elasticity of Supply
1
ElasticInelastic
<1 >1
1. Calculate Elasticity
2. Compare to benchmark of 1

29. %
%
QS
P
10%
20%
=.5 <1
Inelastic

30. %
%
QS
P
40%
20%
= 2 >1
Elastic

31. Price Elasticity of Supply
1
ElasticInelastic
<1 >1
%
%
QS
P

32. ELASTICITY EQUATION BENCHMARK
Price Elasticity
of Demand
Cross-Price
Elasticity
Income
Elasticity
Price Elasticity
of Supply
Midpoint
Formula
Inelastic | Elastic
1
Compliments | Substitutes
0
Inferior | Normal | Luxury
0 1
Inelastic | Elastic
1
%∆QD
%∆P
%∆QS
%∆P
%∆QD1
%∆P2
%∆QD
%∆I
∆Q
∆PQ
Px

33. 1. Prices increase from $5.00 to $6.00.
Quantity demanded decreases from 80 units
to 60 units.
What is the price elasticity of demand?
What is the total revenue at $5.00 per unit?
What is the total revenue at $6.00 per unit?
2. If I increase prices from $20 to $25,
quantity demanded decreases from 1,000
units to 900 units. Should I raise prices?
Why?
3. Prices increase from $10 to $15 for
product A. Quantity demanded for product B
increases from 500 units to 600 units
What is the cross-price elasticity of
demand? Are these products compliments
or substitutes?
4. Prices increase from $10 to $15 for
product C. Quantity demanded for product B
decreases from 40 units to 30 units
What is the cross-price elasticity of
demand? Are these products compliments
or substitutes?
5. Your income increase from $10 to $15 per
hour. Quantity demanded for product E
decreases from 20 units to 15 units
What is the income elasticity of demand? Is
this product an inferior, normal, or luxury
good?
6. Your income decreases from $12 to $10
per hour. Quantity demanded for product F
increases from 10 units to 12 units
What is the income elasticity of demand? Is
this product an inferior, normal, or luxury
good?
Elasticity Quiz

34. 1. Prices increase from $5.00 to $6.00.
Quantity demanded decreases from 80 units
to 60 units.
What is the price elasticity of demand? 1.57
if you used the midpoint formula.
What is the total revenue at $5.00 per unit?
$400
What is the total revenue at $6.00 per unit?
$360
2. If I increase prices from $20 to $25,
quantity demanded decreases from 1,000
units to 900 units. Should I raise prices? Yes
Why? TR will increase from $20,000 to
$22,500.
3. Prices increase from $10 to $15 for
product A. Quantity demanded for product B
increases from 500 units to 600 units
What is the cross-price elasticity of
demand? .4
Are these products compliments or
substitutes? Substitutes
4. Prices increase from $10 to $15 for
product C. Quantity demanded for product B
decreases from 40 units to 30 units
What is the cross-price elasticity of
demand? -.5 Are these products
compliments or substitutes? Compliments
5. Your income increase from $10 to $15 per
hour. Quantity demanded for product E
decreases from 20 units to 15 units
What is the income elasticity of demand? -.5
Is this product an inferior, normal, or luxury
good? Inferior
6. Your income decreases from $12 to $10
per hour. Quantity demanded for product F
increases from 10 units to 12 units
What is the income elasticity of demand?
-1.2 Is this product an inferior, normal, or
luxury good? Inferior
Elasticity Quiz - Answers