macroeconomic mcgrowhill micro ch 4 19e use this one

• Price Elasticity of Demand and How It Can Be Applied • The Usefulness of the Total Revenue Test for Price Elasticity of Demand • Price Elasticity of Supply and How It Can Be Applied

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• Price Elasticity of Demand and

How It Can Be Applied

• The Usefulness of the Total

Revenue Test for Price Elasticity

of Demand

• Price Elasticity of Supply and

How It Can Be Applied

• Cross Elasticity of Demand and

Income Elasticity of Demand

• Consumer Surplus, Producer

Surplus, and Efficiency Losses

Price Elasticity of Demand

Think about it………

The law of demand says consumers will buy more when prices go down and less when prices go up …

HOW MUCH MORE OR LESS?

DOES IT MATTER?

To whom?

Price elasticity, with respect to demand, provides an answer

Price Elasticity of Demand

Measures Responsiveness to Price Changes

Elasticity Coefficient= % delta Q divided by % delta P

Q1 Q2

.01 02

Elasticity = 5, therefore, relatively inelastic…

The percentage change in price

The percentage change in quantity

Commonly Expressed as…

PRICE ELASTICITY OF DEMAND

∆

% P

% ∆ Q d

Price Elasticity of Demand

• Why Use Percentages?

• Elimination of the Minus

Sign

Elastic Demand Inelastic Demand Unit Elasticity

E d = .04 .02 = 2

E d = .01 .02 = 5

E = .02 = 1

Perfectly Inelastic Demand

Perfectly Elastic Demand

(Ed = 0)

Perfectly Elastic Demand

(Ed = ∞)

b

D1

W 6.2

d

D2

W 6.2

f

D3

W 6.2

8 7 6 5 4 3 2 1

5.00 2.60 1.57 1.00 0.64 0.38 0.20

$8,000 14,000 18,000 20,000 20,000 18,000 14,000 8,000

Elastic Elastic Elastic Unit Elastic Inelastic Inelastic Inelastic

(1) Total Quantity of Tickets Demanded Per Week, Thousands Price Per Ticket (2)

(3) Elasticity

Coefficient (E d)

(4) Total Revenue (1) X (2)

(5) Total-Revenue Test

] ] ] ] ] ] ]

] ] ] ] ] ] ]

Price Elasticity of Demand for Movie Tickets as Measured by the Elasticity Coefficient and the Total-Revenue Test

G 6.1

$8 7 6 5 4 3 2 1

a b c d e f g h

Elastic

Ed > 1 Unit Elastic

Ed = 1 Inelastic

Summary of Price Elasticity of

Demand

Price Elasticity of Demand: A Summary

Absolute Value

of Elasticity

Coefficient Demand Is: Description

Impact on Total Revenue of a: Price Increase Price Decrease

Greater than 1

(Ed > 1) Elastic or relatively

elastic

Qd changes by a larger

percentage than does price

Total Revenue decreases Total Revenue increases

Equal to 1

(Ed = 1) Unit or unitary elastic Q the same d changes by

percentage as does price

Qd changes by a smaller

percentage than does price

Total revenue increases

Total revenue decreases

Price Elasticity of Supply

Percentage Change in Quantity

O 6.2

• More elastic supply

• Volatile gold prices

• Inelastic supply

Zero or Near-Zero Value

Percentage Change in Quantity

Demanded of Product X

Percentage Change in Price

of Product Y

E xy =

Quantity demanded of the product changes

in same direction as change in income

Quantity demanded of the product changes

in opposite direction from change in income

Normal or superior

Inferior

Income Elasticity Insights

• High income elasticities

• Most affected by a recession

• Low or negative income

• Least affected by a recession

Elasticity and Pricing Power:

Why Different Consumers Pay Different Prices

• All Buyers in a Highly Competitive Market Pay the Same Price

Regardless of Their Elasticities

• Difficulty in Applying Different Prices

• Observe Differences in Group Elasticities

– Business Travelers – Leisure Travelers – Discounting for Children – Different Net Prices for College

Tuition

Producer surplus

Producer surplus

e

Efficiency loss from underproduction