Chapter 6, Describing supply and demand: elasticities. In this chapter, the learning objectives are: Use elasticity to describe the responsiveness of quantities to changes in price and distinguish five elasticity terms, explain the importance of substitution in determining elasticity of supply and demand, relate price elasticity of demand to total revenue,...
Trang 1Describing Supply and Demand: Elasticities
The master economist must understand symbols and speak in
words. He must contemplate the
particular in terms of the general, and touch abstract and concrete in the same flight of thought.
Trang 2Chapter Goals
to changes in price and distinguish five elasticity terms
elasticity of demand
elasticity of supply and demand
Trang 3Price Elasticity: Demand
Ø Price elasticity of demand is the percentage change
in quantity demanded divided by the percentage
change in price
to a change in price
ED =
% change in Quantity Demanded
% change in Price
Trang 4Price Elasticity: Demand
is greater than the percentage change in price
quantity is less than the percentage change in price
Trang 5Elasticity is Not the Same as Slope
curve is at a given point, the less elastic demand or supply
elastic, meaning that Q responds enormously to
inelastic, meaning that Q
does not respond at all to
changes in price, ED = 0
D P
Trang 6Price Elasticity: Supply
Ø Price elasticity of supply is the percentage change
in quantity supplied divided by the percentage
change in price
a change in price
ES =
% change in Quantity Supplied
% change in Price
Trang 7Price Elasticity: Supply
is greater than the percentage change in price
is less than the percentage change in price
Trang 8Substitution and Elasticity
more elastic its supply or demand
good will cause the consumer to shift consumption
to those substitute goods What makes supply or demand more or less elastic?
Substitution
Trang 9Substitution and Demand
several factors Four of the most important factors:
The importance of the good in one’s budget
Trang 10Elasticity, Total Revenue, and Demand
revenue will change if their price changes
revenue (Price and total revenue move in opposite
directions.)
unchanged
Trang 11Relationship Between Elasticity and
Total Revenue
Elastic (ED > 1) TR decreases TR increases
Unit Elastic (ED = 1) TR constant TR constant
Inelastic (ED < 1) TR increases TR decreases
Trang 12Elasticity of Individual and Market Demand
people with less elastic demand from those with more
elastic demand
individuals with inelastic demand and less to individuals
with elastic demand
Trang 13Income and Cross-Price Elasticity
Ø Income elasticity of demand measures the responsiveness
of demand to changes in income
Ø Normal goods are those whose consumption increases
with an increase in income
EIncome
=
% change in Demand
% change in Income
• Necessity: 0 < EIncome > 1
• Luxury: EIncome > 1
Ø Inferior goods are those whose consumption decreases
Trang 14Income and Cross-Price Elasticity
Ø Cross–price elasticity of demand measures the
responsiveness of demand to changes in prices of
other goods
Ø Substitutes are goods that can be used in place of
another, Ecross-price > 0
Ecross-price =
% change in Demand
% change in P of related good
Ø Complements are goods that are used conjunction with
Trang 15Ø The more elastic the demand (supply), the greater the effect of
a supply (demand) shift on quantity and the smaller the
effect on price.
S1
D
P
Demand is relatively elastic
S0
Supply shifts out and caused
a greater effect on quantity
than on price
P
0
P
1
Trang 16D
P
Demand is relatively inelastic
S0
Supply shifts out and caused
a greater effect on price than
on quantity
P
0
P
1
Elasticity and Shifting Supply and Demand
Trang 17Ø Elasticity is percentage change in quantity divided by
percentage change in some variable that affects demand (supply) The most common elasticity is price
unit elastic (E=1); perfectly inelastic (E=0); and perfectly
elastic (E=∞)
a demand curve
substitutes in supply is time The longer the time
Trang 18Ø Factors affecting the number of substitutes in demand are:
time period, degree to which the good is a luxury, market
definition, importance of the good in one’s budget
revenue increases; if demand is elastic, total revenue
decreases; if demand is unit elastic, total revenue remains
constant