Bài giảng topic 2(b) elasticity

What is elasticity of demand?The responsiveness of quantity demanded to a change in one of its determining factors... Price Elasticity is...D As price increases from... Computing the

Elasticity of Demand & Supply

Topic 2(b)

What is the difference between these 2 diagrams?

What is elasticity of demand?

The responsiveness of quantity

demanded

to a change in one of its determining factors

Point & Arc elasticity

 Point elasticity

 is elasticity at a specific point

 changes measured are likely to be very small

 Arc elasticity

 is the average elasticity between 2 points

Price Elasticity is

D

As price increases from

Price Elasticity of Demand

The responsiveness of quantity

demanded to a change in price of a

product

% change in quantity demanded (Q)

% change in own price (P)

Computing the price elasticity of

demand

Example 1: If the price of an ice cream cone

increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones Calculate

your elasticity of demand

Example 2: If the price of an ice cream cone

decreases from $2.20 to $2.00 and the

amount you buy increases from 8 to 10 cones Calculate your elasticity of demand

The midpoint method

 The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the

Price Elasticity of Demand

Use of percentages

choice of units

product comparison

The minus sign indicates the demand

follows the Law of Demand.

The absolute value of the coefficient

measures the price elasticity of demand.

Price Elasticity of Demand (cont.)

Elastic Demand

a given percentage change in price results

in a larger percentage change in quantity demanded

Ed > 1

Price Elasticity of Demand (cont.)

Inelastic Demand

a given percentage change in price results

in a relatively smaller percentage change in quantity demanded

Ed < 1

Price Elasticity of Demand (cont.)

Unit elasticity

a given percentage change in price results

in an equal percentage change in quantity demanded

Ed = 1

Perfectly Inelastic Demand

Q

Perfectly inelastic demand

Ed = 0

Perfectly Elastic Demand

Q

Perfectly inelastic demand

D2

Perfectly elastic demand

Ed = ∞

Elasticity & Total Revenue

Knowing the value of the elasticity can tell us about the effect of a price change

on Total Revenue

TR = Price x Qd

4

0 2 4 6 7 8 10 12 14

1 2 3 4 5

of Demand

and Revenue

8 12 16

20

TR

E d > 1

4

0 2 4 6 7 8 10 12 14

1 2 3 4 5

of Demand

and Revenue

8 12 16 20

E d > 1

E d = 1

4

0 2 4 6 7 8 10 12 14

1 2 3 4 5

of Demand

and Revenue

8 12 16

Elasticity & Total Revenue

Elasticity & Total Revenue

Summary:

If demand is elastic, a change in Price elastic

will cause Total Revenue to change in

the opposite direction opposite direction

If demand is inelastic, a change in price inelastic

will cause total revenue to change in the

same direction.

Own Price elasticity – its

Price Elasticity of Supply

Es=

% change in quantity supplied of product X

% change in the price of product X

• The responsiveness of quantity supplied

to a change in price of a product

Price Elasticity of Supply (cont.)

Price Elasticity of Supply (cont.)

Cross price elasticity

What value of EXY would you expect for a

Substitute good

Complementary good

 RQ #5

Cross price elasticity

 E XY < 0 : Complementary goods

 E XY > 0 : Substitute goods

 E XY = 0 or near zero : Independent goods

 Size of E XY measures the degree of

complementarity or substitutability

Discussion Questions

elastic over the longer term, and yet

it could still be observed that over

time people consume more oil (or

only very slightly less) despite rising oil prices How can this apparent

contradiction be explained?

Discussion Questions

2) Why may a restaurant charge very high prices for wine and bottled

water and yet quite reasonable

prices for food?

Discussion Questions

3) Why are clothes with designer

labels so much more expensive

than ‘own brand’ clothes from a

chain store, even though they may cost a similar amount to produce?