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Economics 100

Economics 100. Lecture 8 Elasticity. Elasticity. Price elasticity of demand Calculating the price elasticity of demand. Price Elasticity of Demand. A measure of the responsiveness of the quantity demanded to price holding other things constant. Price Elasticity of Demand.

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Economics 100

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  1. Economics 100 Lecture 8 Elasticity

  2. Elasticity • Price elasticity of demand • Calculating the price elasticity of demand

  3. Price Elasticity of Demand • A measure of the responsiveness of the quantity demanded to price holding other things constant

  4. Price Elasticity of Demand • Figure 5.1 (a) shows the case in which a cut in supply increases total revenue

  5. Price Elasticity of Demand • Figure 5.1 (b) shows the case in which that same cut in supply decreasestotal revenue

  6. Price Elasticity of Demand • Whether total revenue increases or decreases with a price change depends on how sensitive the quantity demanded is to a change in price • We would like to derive a measure of that sensitivity...

  7. Price Elasticity of Demand • The slope of a demand curve is a measure of the responsiveness of the quantity demanded of a good to a change in its price, holding constant all other influences on the quantity demanded • Problem: slope depends on units of measurement!!!!!!!!!! (we cannot compare the demand for pizza and the demand for books!!!)

  8. Price Elasticity of Demand • Solution: Price elasticity of demand • The price elasticity of demandis the percentage change in the quantity demanded of a good divided by the percentage change in its price • Elasticity does not depend on units of measurement!!!

  9. Calculating the Price Elasticity of Demand %Q -------------- %P

  10. Note for ECON 100 • IN ECON 100 we will calculate percentages of the average price and average quantity to avoid different numbers for a price rise and price fall • This means that we really calculate the elasticity at a point midway between the equilibrium point before and after the price change. Ideally, we would want to calculate it at a single point, with no approximations…

  11. %Q Q/ Qave ------- = ----------- %P P/ Pave

  12. Calculating the Price Elasticity of Demand

  13. Calculating the Price Elasticity of Demand

  14. Calculating the Price Elasticity of Demand • Negative sign • Price increase (a positive change in price) leads to a • Quantity decrease (a negative change in quantity) • The formula uses the absolute value of these changes and does not attach the minus sign to the decrease in quantity

  15. ELASTICITY • Note that the price-elasticity of demand is UNIT-FREE!!!, which is very useful for comparisons! • Between countries • between goods • over time

  16. Next, more about elasticities

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