In this chapter you will learn the meaning of the elasticity of demand, examine what determines the elasticity of demand, learn the meaning of the elasticity of supply, examine what determines the elasticity of supply, apply the concept of elasticity in three very different markets.
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Elasticity
• … allows us to analyze supply and demand
with greater precision.
• … is a measure of how much buyers and sellers respond to changes in market conditions
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THE ELASTICITY OF DEMAND
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The Price Elasticity of Demand and Its
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The Price Elasticity of Demand and Its
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Computing the Price Elasticity of Demand
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The Midpoint Method: A Better Way to
Calculate Percentage Changes and
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The Midpoint Method: A Better Way to
Calculate Percentage Changes and
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The Variety of Demand Curves
• Price elasticity of demand is greater than one.
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Computing the Price Elasticity of Demand
Demand is price elastic
$5
4
Demand
Quantity 100
3 percent
22
percent
67
5.00)/2 (4.00
5.00)
(4.00 (100 50)/2
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The Variety of Demand Curves
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The Variety of Demand Curves
• Because the price elasticity of demand
measures how much quantity demanded
responds to the price, it is closely related to the slope of the demand curve
Trang 14Figure 1 The Price Elasticity of Demand
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(a) Perfectly Inelastic Demand: Elasticity Equals 0
$5 4
Quantity
Demand
100 0
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(b) Inelastic Demand: Elasticity Is Less Than 1
Trang 16Figure 1 The Price Elasticity of Demand
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2 leads to a 22% decrease in quantity demanded.
(c) Unit Elastic Demand: Elasticity Equals 1
Quantity
4
100 0
Trang 17Figure 1 The Price Elasticity of Demand
(d) Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
100 0
Trang 18Figure 1 The Price Elasticity of Demand
(e) Perfectly Elastic Demand: Elasticity Equals Infinity
1 At any price above $4, quantity demanded is zero.
3 At a price below $4,
quantity demanded is infinite.
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Total Revenue and the Price Elasticity of
Trang 20Figure 2 Total Revenue
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Elasticity and Total Revenue along a Linear
Trang 22Figure 3 How Total Revenue Changes When Price
Changes: Inelastic Demand
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$240
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Elasticity and Total Revenue along a Linear
Trang 24Figure 4 How Total Revenue Changes When Price
Changes: Elastic Demand
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$100
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Elasticity of a Linear Demand Curve
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Income Elasticity of Demand
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Computing Income Elasticity
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Income Elasticity
• Goods consumers regard as necessities tend to
be income inelastic
• Examples include food, fuel, clothing, utilities, and medical services.
• Goods consumers regard as luxuries tend to be
income elastic
• Examples include sports cars, furs, and expensive
foods.
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THE ELASTICITY OF SUPPLY
Trang 31Figure 6 The Price Elasticity of Supply
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(a) Perfectly Inelastic Supply: Elasticity Equals 0
$5 4
Supply
Quantity
100 0
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(b) Inelastic Supply: Elasticity Is Less Than 1
Trang 33Figure 6 The Price Elasticity of Supply
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(c) Unit Elastic Supply: Elasticity Equals 1
Trang 34Figure 6 The Price Elasticity of Supply
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(d) Elastic Supply: Elasticity Is Greater Than 1
Trang 35Figure 6 The Price Elasticity of Supply
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(e) Perfectly Elastic Supply: Elasticity Equals Infinity
1 At any price above $4, quantity supplied is infinite.
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Determinants of Elasticity of Supply
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Computing the Price Elasticity of Supply
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APPLICATION of ELASTICITY
• Can good news for farming be bad news for
farmers?
• What happens to wheat farmers and the market for wheat when university agronomists discover
a new wheat hybrid that is more productive
than existing varieties?
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THE APPLICATION OF SUPPLY,
DEMAND, AND ELASTICITY
Trang 40Figure 8 An Increase in Supply in the Market for Wheat
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Quantity of
Wheat
0
Price of Wheat
3 and a proportionately smaller increase in quantity sold As a result, revenue falls from $300 to $220
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Compute the Price Elasticity of Supply
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Summary
• Price elasticity of demand measures how much the quantity demanded responds to changes in
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Summary
• The income elasticity of demand measures how much the quantity demanded responds to
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