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Elasticity
A measure of the responsiveness of one variable (usually quantity demanded or supplied) to a change in another variable
Most commonly used elasticity: price elasticity of demand, defined as:
Elasticity(film)
Price elasticity of demand =priceofchange
demandedquantityofchange
__%
___%
usually takes negative values◦ when price grows, quantity demanded decreases◦ when price decreases, quantity demanded increases
the exceptions:◦ The Veblen effect is one of a family of theoretically
possible anomalies in the general theory of demand. It is claimed that some types of high-status goods, such as diamonds or luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products.[1] Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable.
Price elasticity of demand
Giffen good the classic example given by Marshall is staple foods of inferior
quality, whose demand is driven by poverty, that makes their purchasers
unable to afford superior foodstuffs. As the price of the cheap staple food rises, they can no longer
afford to supplement their diet with better foods, and must consume more of the staple food.
Marshall wrote in the 1895 edition of Principles of Economics: As Mr. Giffen has pointed out, a rise in the price of bread makes so
large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.
exception cont.
Demand is said to be:◦ elastic when Ed < -1,◦ unit elastic when Ed = -1, and◦ inelastic when Ed >-1.
Price elasticity of demand
Even small change of price results decreasing of demand till zero
Perfectly elastic demand
Customers buy the same amount of good, regardless of good’s price
Perfectly inelastic demand
a price increase from $1 to $2 represents a 100% increase in price,
a price increase from $2 to $3 represents a 50% increase in price,
a price increase from $10 to $11 represents a 10% increase in price.
Notice that, even though the price increases by $1 in each case, the percentage change in price becomes smaller when the starting value is larger.
Elasticity & slope(film)
Elasticity along a linear demand curve
Elasticity along a linear demand curve
Elasticity measure
where: ΔQ - change of quantity demandedQ – quantity demanded before price change ΔP – change of priceP – price before change
PPQQ
demandofelasticityprice
___
Suppose that quantity demanded falls from 60 to 40 when the price rises from $3 to $5. The price elasticity of demand equls…
Example
In this interval, demand is inelastic (since elasticity >- 1).
Total revenue = price times quantity What happens to total revenue if the price
rises?
Elasticity and total revenue
Ticket prices Demand Price elasticity of demand
Total revenue
12,5 0 oo 0 10 20 4 200 7,5 40 1,5 300 6,25 50 1 312,5 5,0 60 0,67 300 2,5 80 0,25 200 0 100 0 0
A reduction in price will lead to:◦ an increase in TR when demand is elastic.◦ a decrease in TR when demand is inelastic.◦ an unchanged level of total revenue when
demand is unit elastic.
Elasticity and TR (cont.)
Price elasticity of demand =priceofchange
demandedquantityofchange
__%
___%
different customers are charged different prices for the same product, due to differences in price elasticity of demand
higher prices for those customers who have the most inelastic demand
lower prices for those customers who have a more elastic demand.
Price discrimination
Theatres usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age category, with the highest charge going to the adult population.
Some companies, such as firms selling alcoholic beverages, produce similar products but try to promote one as a prestige brand with a much higher price.
Examples of Price discrimination
Price elasticity of demand is relatively high when:
close substitutes are available, the good or service is a large share of the
consumer's budget, a longer time period is considered, the customers are rather poor.
Determinants of price elasticity
Price elasticity of demand is relatively low when:
There are no close substitutes (e.g. electricity, water)
Goods are necessities Customers are rather rich The good or service is a small share of the
consumer's budget
Determinants of price elasticity
The cross-price elasticity of demand between two goods j and k is defined as:
Cross-price elasticity of demand
cross-price elasticity is positive if and only if the goods are substitutes
cross-price elasticity is negative if and only if the goods are complements.
Cross-price elasticity (cont.)
A good is a normal good if income elasticity > 0.
A good is an inferior good if income elasticity < 0.
Income elasticity of demand(film)
A good is a luxury good if income elasticity > 1.
A good is a necessity good if income elasticity < 1.
Income elasticity of demand
Price elasticity of supply
Example: land
Perfectly inelastic supply
Example: perfect competition
Perfectly elastic supply
short run - period of time in which capital is fixed
all inputs are variable in the long run supply will be more elastic in the long run
than in the short run since firms can expand or contract their capital in the long run.
Determinants of supply elasticity
równanie – equation układ równań - simultaneous equations ułamek – fraction ułamek piętrowy – compound fraction malejąca (rosnąca) funkcja – decreasing (increasing) function funkcja liniowa – linear function iloraz – quotient iloczyn – product różnica – difference suma – sum sumowanie – summation dodatni – positive ujemny – negative licznik – numerator mianownik - denominator
Math dictionary
http://www.oswego.edu/~kane/eco101.htm Czarny B. „Podstawy Ekonomii”, 2002 www.wikipedia.org Wood, John C. (1993). Thorstein Veblen:
Critical Assessments, 352. London Alfred Marshall, 1895. Principles of
Economics Bk.III,Ch.VI in paragraph III.VI.17
Bibliography
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