Ch 4 elasticity
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Ch. 4: Elasticity. Define, calculate, and explain the factors that influence the price elasticity of demand the cross elasticity of demand the income elasticity of demand the elasticity of supply. Price Elasticity of Demand.

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Ch 4 elasticity
Ch. 4: Elasticity.

Define, calculate, and explain the factors that influence

  • the price elasticity of demand

  • the cross elasticity of demand

  • the income elasticity of demand

  • the elasticity of supply


Price elasticity of demand
Price Elasticity of Demand

  • The slope of the demand curve affects how much equilibrium price and quantity change for a given change in supply.


Price elasticity of demand1
Price Elasticity of Demand

  • Price elasticity of demand

    • units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus.


Price elasticity of demand2
Price Elasticity of Demand

%DQ = DQ/Qavg

= 2/10

= .2

%DP = DP/Pavg

= -$1/$20

= -.05

e = .2/.05 =4


Price elasticity of demand3
Price Elasticity of Demand

  • By using the average price and average quantity, we get the same elasticity value regardless of whether the price rises or falls.

  • Measuring as % changes leaves the elasticity value the same (“units free”).

  • Although the formula yields a negative value for elasticity because price and quantity move in opposite directions, we report the absolute value.


Price elasticity of demand4
Price Elasticity of Demand

  • Inelastic and Elastic Demand

  • if e>1: elastic

  • if e=1: unit elastic

  • if e<1: inelastic

  • Shape of

    • Perfectly inelastic demand curve (e=0)

    • Perfectly elastic demand curve (e= infinite)


Price elasticity of demand5
Price Elasticity of Demand

At prices above the mid-point of the demand curve, demand is elastic.

At prices below the mid-point of the demand curve, demand is inelastic.


Price elasticity of demand6
Price Elasticity of Demand

  • Total Revenue and Elasticity

    • TR=P*QD

    • When P changes, TR could rise or fall because QD moves in opposite direction.

    • But a higher price doesn’t always increase total revenue.


Price elasticity of demand7
Price Elasticity of Demand

  • %D TR = % D P + % D Q

    = % D P - % D P(e)

    = % D P(1-e)

  • If demand is elastic (e>1),

    P increase  TR decreases

    P decrease  TR increases

  • If demand is inelastic (e<1),

    P increase  TR increases

    P decrease  TR decreases

  • If demand is unitary elastic,

    P increase or decrease  TR unchanged.


Price elasticity of demand8
Price Elasticity of Demand

  • As P falls from $25 to $12.50, D is elastic, and TR rises.

  • At $12.50, D is unit elastic and TR stops increasing.

  • As P falls from $12.50 to 0, D is inelastic, and TR decreases.



Price elasticity of demand10
Price Elasticity of Demand

  • The elasticity of demand for a good depends on:

    • The number & closeness of substitutes

    • The proportion of income spent on the good

    • The time elapsed since a price change


More elasticities of demand
More Elasticities of Demand

  • Cross Elasticity of Demand

    • measures responsiveness of demand for a good to a change in the price of another good.

      exy= %D quantity demanded for x

      %D change in price of y

    • exy > 0  substitutes

    • exy <0  complements


More elasticities of demand1
More Elasticities of Demand

  • Income Elasticity of Demand

    • measures how the quantity demanded of a good responds to a change in income, ceteris paribus. eI = %D in quantity demanded

      % D in income

    • eI >0  normal good

    • eI >1 luxury good

    • eI <0 inferior good


Price elasticity of supply
Price Elasticity of Supply

A change in demand causes

  • A larger change in equilibrium price if supply is supply is steeper,

  • A smaller change in equilibrium quantity if supply is steeper.


Elasticity of supply
Elasticity of Supply

Elasticity of supply

  • measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same.



Elasticity of supply2
Elasticity of Supply

  • Factors That Influence the Elasticity of Supply

    • Elasticity of supply for inputs

    • Substitution possibilities for inputs

    • The time frame for supply decisions

    • Storage costs


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