View
223
Download
2
Category
Preview:
Citation preview
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
1/64
Managerial EconomicsExecutive MBA Program
Session 3: Elasticity and itsApplication
InstructorSandeep Basnyat9841892281Sandeep_basnyat@yahoo.com
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
2/64
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
3/64
Elasticity Basic idea: Elasticity measures how much
one variable responds to changes inanother variable.
One type of elasticity measures how much
demand for your websites will fall if you raiseyour price.
Definition:
Elasticityis a numerical measure of theresponsiveness of Qd or Qs to one of itsdeterminants.
Elastic and Inelastic demand and supply.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
4/64
Price Elasticity of Demand
Price elasticity of demandmeasureshow much Qdresponds to a change in P.
Price elasticityof demand
=Percentage change in Qd
Percentage change in P
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
5/64
Price Elasticity of Demand
Priceelasticityof demand
equals
P
Q
D
Q2
P2
P1
Q1
P risesby 10%
Q fallsby 15%
15%
10%= 1.5
Price elasticityof demand =
Percentage change in Qd
Percentage change in P
Example:
What does elastic i ty = 1.5 mean?
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
6/64
Calculating Percentage Changes
P
Q
D
$250
8
B
$200
12
A
CalculatePrice
Elasticity ofDemand
Standard method
of computing thepercentage (%) change:
end valuestart value
start valuex 100%
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
7/64
Calculating Percentage Changes
P
Q
D
$250
8
B
$200
12
A
Demand foryour websites
Problem:
From A to B,
Prises 25%, Qfalls 33%,elasticity = 33/25 = -1.33
From B to A,
Pfalls 20%, Qrises 50%,
elasticity = 50/20 = - 2.50
How to solve th is confus ion?
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
8/64
Calculating Percentage Changes So, we instead use the midpoint method:
end valuestart value
midpointx 100%
The midpoint is the number halfway betweenthe start & end values, also the average of
those values.
It doesnt matter which value you use as the
start and which as the end you get the
same answer either way!
What is PED using midpoint method?
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
9/64
Calculating Percentage Changes Using the midpoint method, the % change
in Pequals
$250$200
$225x 100% = 22.2%
The % change in Qequals
812
10x 100% = - 40.0%
The price elasticity of demand equals
- 40/22.2 = -1.8
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
10/64
ACTIVE LEARNING 1:Calculate an elasticity
Use the followinginformation tocalculate theprice elasticity
of demandfor hotel rooms usingmidpoint method:
if P= $70, Qd
= 5000if P= $90, Qd= 3000
10
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
11/64
ACTIVE LEARNING 1:Answers
Use midpoint method to calculate% change in Qd
(50003000)/4000 = 50%
% change in P
($70$90)/$80 = -25%
The price elasticity of demand equals
11
50%
- 25%= - 2.0
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
12/64
Calculating Price Elasticity ofDemand
Arc Elasticity:
where Dindicates change.
Example
If a 1% increase in price results in a 3% decrease inquantity demanded, the elasticity of demandis e= -
3%/1% = -3.
Q
p
p
Q
p
p
Q
Q
p
Q
D
D
D
D
D
D
%
%e
Two Ways:Arc elasticity Calculation and Point
Elasticity CalculationImportant Note:
Along a Dcurve, Pand Qmove inopposite directions,which would makeprice elasticitynegative most of thecases. (E
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
13/64
Numerical example
Consider a competitive market for which the
quantities demanded and supplied (peryear) at various prices are given as follows:
Price($) Demand (millions) Supply
(millions)60 22 14
80 20 16
100 18 18
120 16 20
Calculate the price elasticity of demand whenthe price is $80. When the price is $100.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
14/64
Solution to Numerical example
.P
Q
Q
P
P
P
Q
Q
E DD
D
D
DD
D
D
D
From the above question, with each price increase of $20, the quantitydemanded decreases by 2. Therefore,
DQDDP
220
0.1.
At P = 80, quantity demanded equals 20 and
ED 80
20 0.1 0.40.Similarly, at P = 100, quantity demanded equals 18 and
ED 100
18
0.1 0.56.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
15/64
Calculating Price Elasticity ofDemand
The estimated linear demand function for porkis:
Q= 286 -20p
where Qis the quantity of pork demanded in millionkg per year and p is the price of pork in $ per year.
At the equilibrium point ofp = $3.30 and Q= 220Find the elasticity of demand for pork:
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
16/64
Demand
Use of derivative: dQ/dP: denotes rate at whichquantity changes with respect to Price: similar to:
So, replace by dQ/dP in theArc elasticity formula,
So the elasticity of demand is:
)/( Q
pdPdQQ
p
p
Q
D
D
e
Point Elasticity: Elasticity at a particular point (price)
p
Q
D
D
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
17/64
Calculating Price Elasticity ofDemand
The estimated linear demand function for porkis:
Q= 286 -20p
where Qis the quantity of pork demanded in millionkg per year and p is the price of pork in $ per year.
At the equilibrium point ofp = $3.30 and Q= 220 theelasticity of demand for pork:
3.0220
30.320)/(
Q
pdPdQe
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
18/64
Numerical ProblemsConsider a market with Demand curve q = 16 10pand Supply curve
q = 8 + 20p.(Here q is in millions of kgs and p is in dollars/kg)
(a) Determine the market equilibrium price and quantity and the total
revenue in this market.
(b) Calculate the price elasticity of demand and the price elasticity of
supply at the market equilibrium.
Answer (a):
P = $0.8/kg q = 8 million kgs. TR = $6.4 millions
Answer (b):PED = -1PES = 2
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
19/64
What determines the Elasticity of Demand?EXAMPLE 1:
Wai Wai vs. Yogurt or curd
The prices of both of these goods rise by 20%.For which good doesQddrop the most? Why?
Wai Wai has lots of close substitutes
(e.g., Rum Pum, Mayoz etc.),
so buyers can easily switch if the price rises.
Yogurt has no close substitutes,
so consumers would probably not
buy much less if its price rises.
Lesson: Price elast ic i ty is h igher when closesubs ti tutes are avai lable.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
20/64
EXAMPLE 2:
Blue Jeans vs. Clothing
The prices of both goods rise by 20%.
For which good doesQddrop the most? Why? For a narrowly defined good such as
blue jeans, there are many substitutes
(khakis, shorts, Speedos, or even cottonpant).
There are fewer substitutes available for
broadly defined goods.
(Can you think of a substitute for clothing,
other than living in a nudist colony?)
Lesson: Price elast ic i ty is h igher for narrow ly
def ined goods than broadly def ined ones.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
21/64
EXAMPLE 3:
Insulin vs. Caribbean Cruises
The prices of both of these goods rise by 20%.For which good doesQddrop the most? Why?
To millions of diabetics, insulin is a
necessity.
A rise in its price would cause little or no
decrease in demand.
A cruise is a luxury. If the price rises,
some people will forego it.
Lesson: Price elast ic i ty is h igher for lu xu r iesthan for necess i t ies.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
22/64
EXAMPLE 4:
Gasoline in the Short Run vs. Gasoline in the
Long Run
The price of gasoline rises 20%. Does Qddropmore in the short run or the long run? Why?
Theres not much people can do in the
short run, other than ride the bus or carpool. In the long run, people can buy smaller cars
or live closer to where they work.
Lesson: Price elast ic i ty is higher in thelong run than the shor t run.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
23/64
The Determinants of Price Elasticity:A Summary
The price elasticity of demand dependson:
the extent to which close substitutes are
available
whether the good is a necessity or a luxury
how broadly or narrowly the good is defined
the time horizon: elasticity is higher in the
long run than the short run.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
24/64
The Variety of Demand Curves
Economists classify demand curves
according to their elasticity.
The price elasticity of demand is closelyrelated to the slope of the demand curve.
Rule of thumb:The flatter the curve, the bigger the elasticity.The steeper the curve, the smaller the
elasticity. The next 5 slides present the different
classifications, from least to most elastic.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
25/64
Q1
P1
D
Perfectly inelastic demand (one extreme case)
P
Q
P2
P fallsby 10%
Q changesby 0%
0%
10%= 0
Price elasticity
of demand
=% change in Q
% change in P=
Consumers
price sensitivity:
Dcurve:
Elasticity:
vertical
0
0
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
26/64
D
Inelastic demand
P
QQ1
P1
Q2
P2
Q rises lessthan 10%
< 10%
10%< 1
Price elasticity
of demand
=% change in Q
% change in P=
P fallsby 10%
Consumers
price sensitivity:
Dcurve:
Elasticity:
relatively steep
relatively low
< 1
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
27/64
D
Unit elastic demand
P
QQ1
P1
Q2
P2
Qrises by 10%
10%
10%= 1
Price elasticity
of demand
=% change in Q
% change in P=
P fallsby 10%
Consumers
price sensitivity:
Elasticity:
intermediate
1
Dcurve:
intermediate slope
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
28/64
D
Elastic demand
P
QQ1
P1
Q2
P2
Q rises morethan 10%
> 10%
10%> 1
Price elasticity
of demand
=% change in Q
% change in P=
P fallsby 10%
Consumers
price sensitivity:
Dcurve:
Elasticity:
relatively flat
relatively high
> 1
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
29/64
D
Perfectly elastic demand (the other extreme)
P
Q
P1
Q1Pchanges
by 0%
Q changesby any %
any %
0%= infinity
Q2
P2=Consumers
price sensitivity:
Dcurve:
Elasticity:
infinity
horizontal
extreme
Price elasticity
of demand
=% change in Q
% change in P=
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
30/64
Elasticity of a Linear Demand Curve
The slopeof a lineardemandcurve is
constant,but itselasticityis not.
P
Q
$30
20
10
$00 20 40 60
200%
40%= 5.0E =
67%
67% = 1.0E =
40%
200%= 0.2E =
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
31/64
Price Elasticity and Total Revenue Continuing our scenario, if you raise your price
from $200 to $250, would your revenue rise or fall?Revenue = Px Q
A price increase has two effects on revenue:
Higher Pmeans more revenue on each unit
you sell.
But you sell fewer units (lower Q), due to
Law of Demand.
Which of these two effects is bigger?It depends on the price elasticity of demand.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
32/64
Price Elasticity and Total Revenue
If demand is elastic, thenprice elast. of demand > 1
% change in Q > % change in P
The fall in revenue from lower Q is greaterthan the increase in revenue from higher P,so revenue falls.
Revenue = Px Q
Price elasticityof demand =
Percentage change in Q
Percentage change in P
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
33/64
Price Elasticity and Total Revenue
Elastic demand
(elasticity = 1.8) P
Q
D
$200
12
If P= $200,
Q= 12 and
revenue = $2400.
When Dis elastic,
a price increase
causes revenue to fall.
$250
8
If P= $250,
Q= 8 and
revenue = $2000.
lostrevenuedue tolower Q
increased
revenue dueto higher P
Demand foryour websites
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
34/64
Price Elasticity and Total Revenue
If demand is inelastic, then
price elast. of demand < 1
% change in Q < % change in P
The fall in revenue from lower Qis smallerthan the increase in revenue from higher P,
so revenue rises.
In our example, suppose that Qonly falls to 10(instead of 8) when you raise your price to
$250.
Revenue = Px Q
Price elasticity
of demand =
Percentage change in Q
Percentage change in P
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
35/64
Price Elasticity and Total RevenueNow, demand is
inelastic:elasticity = 0.82 P
Q
D
$200
12
If P= $200,
Q= 12 and
revenue = $2400. $250
10
If P= $250,
Q= 10 and
revenue = $2500.When Dis inelastic,
a price increase
causes revenue to rise.
lostrevenuedue to
lowerQ
increased
revenue dueto higher P
Demand foryour websites
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
36/64
ACTIVE LEARNING 2:Answers
36
A. Pharmacies raise the price of insulin by10%. Does total expenditure on insulinrise or fall?
Expenditure = Px QSince demand is inelastic, Qwill fall lessthan 10%, so expenditure rises.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
37/64
ACTIVE LEARNING 2:Answers
37
B. As a result of a fare war, the price of a luxurycruise falls 20%.Does luxury cruise companies total revenue
rise or fall?
Revenue = Px Q
The fall in Preduces revenue,but Qincreases, which increases revenue.
Which effect is bigger?Since demand is elastic, Qwill increase morethan 20%, so revenue rises.
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
38/64
Income Elasticity of Demand The income elasticity of demandmeasures the
response of Qdto a change in consumer income.
Income elasticityof demand
=Percent change in Qd
Percent change in income
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
39/64
Calculating Income Elasticity of Demand
Arc Elasticity:
where Ystands for income.
Example
If a 1% increase in income results in a 3% decrease inquantity demanded, the income elasticity of demandis x= -3%/1% = -3.
Q
Y
Y
Q
YY
Q
Q
Y
Q
D
D
D
D
D
D
%
%x
N i l E l
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
40/64
Numerical Example
a) Suppose the demand for an automobile as a functionof income per capita is given by:
Q = 50,000 + 5I
What is the income elasticity of demand when per capita
income increases from $10,000 to $11,000? (Using midpoint
method)
N i l E l
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
41/64
Numerical Example
a) Suppose the demand for an automobile as a functionof income per capita is given by:
Q = 50,000 + 5I
What is the income elasticity of demand when per capita
income increases from $10,000 to $11,000? (Using midpoint
method)
Solution:
When I1= 10,000 Q1= 100,000
When I2= 11,000, Q2= 105,000
Percentage Change in Q = 4.88Percentage Change in I = 9.52
Income Elasticity of Demand = 4.88 / 9.52 = 0.512
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
42/64
Numerical Example-Point Income Elasticity
b) Suppose the demand for an automobile as a function
of income per capita is given by:Q = 50,000 + 5I
What is the income elasticity of demand at the income level
of $10,500?
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
43/64
Numerical Example
b) Suppose the demand for an automobile as a function
of income per capita is given by:Q = 50,000 + 5I
What is the income elasticity of demand at the income level
of $10,500?
Solution:
When I = 10,500; Q = 102,500
dQ / dI = 5
Income Elasticity of Demand = b x (P/Q)
= 5 x (10500 / 102500)
E = 0.512
Necessities Inferior goods and
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
44/64
Necessities, Inferior goods andluxuriesElasticity measurement as:
E < 0 : Inferior goods (negative)
0 < E 1: Normal goods or necessities
E > 1 : Luxuries
An increase in income causes an increase in
demand for a normalgood and luxuries.
An increase in income causes a decrease indemand for inferior goods.
C P i El ti it f D d
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
45/64
Cross Price Elasticity of Demand The cross-price elasticity of demandmeasures the
response of demand for one good to changes in theprice of another good.
Cross-price elast.
of demand
=% change in Qd for good 1
% change in price of good 2
For substitutes, cross-price elasticity > 0 (positive)
E.g., an increase in price of goat meat causes an
increase in demand for chicken.
For complements, cross-price elasticity < 0
(Negative)
E.g., an increase in price of computers causes
decrease in demand for software.
Calculating Cross Price Elasticity of
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
46/64
Calculating Cross Price Elasticity ofDemand
Arc Elasticity,
wherePostands for price of another good.
Example
If a 1% increase in the price of a related good results in a3% decrease in quantity demanded, the cross-priceelasticity of demandis = -3%/1% = -3.
Q
p
p
Q
pp
Q
Q
p
Q o
o
o
oo D
D
D
D
D
D
%
%
Numerical Example
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
47/64
Numerical ExampleDemand for a publishers book is given as:
Qx= 12,0005,000Px+ 5I+ 500Pc Px = Price of the book = $5
I = Income per capita = $10,000
Pc
= Price of the books from competingpublishers = $6
Numerical Example
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
48/64
Numerical Example1) a) Find Price elasticity of demand for the book.
b) What effect a price increase would have on total
revenues?Solution:
a) Substituting the values of I and Pc
Qx= 12,0005,000Px+ 5(10000) + 500(6)
Or, Qx= 65,0005,000Px
When Px = $5 (given), Qx = 40,000Now, dQx/dPx= - 5000
Therefore, E p = -5000 x (5 / 40000) = - 0.625
b) Since, the demand for the book is inelastic, anincrease in the price of the book would increasetotal revenue.
Numerical Example
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
49/64
Numerical Example2) a) Find income elasticity of demand for the book.
b) Find if the book is inferior good, normal good or luxury.
Solution:
a) Substituting the values of Px and PcQx= 12,0005,000(5) + 5I+ 500(6)
Or, Qx= - 10,000 + 5I
When I= $10000 (given), Qx = 40,000Now, dQx/dI = b = 5Therefore, E I = 5 x (10000 / 40000) = 1.25
b) Since, the E I> 1 for the book, the book is luxury.
Numerical Example
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
50/64
Numerical Example3) a) Assess the probable impact on demand for the book
if competing publishers raise their prices.
b) Are the books substitute for each other orcomplementsSolution:
a) Substituting the values of Px and IQx= 12,0005,000(5) + 5(10000) + 500Pc
Or, Qx
= 37,000 + 500Pc
When Pc = $6 (given), Qx = 40,000
Now, dQx/dPc= b = 500
Therefore, Cross price elasticity of demand for the book
E c = 500 x (6 / 40000) = 0.0751% increase in competitors book price will increase the
demand for the book by 0.075%
b) Since, the E C> 0 for the book, the book is substitute to
competing producers book.
P i El ti it f S l
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
51/64
Price Elasticity of Supply
Price elasticity of supplymeasures
how much Qs
responds to a change inP.
Price elasticityof supply =
Percentage change in Qs
Percentage change in P
P i El ti it f S l
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
52/64
Q2
Price Elasticity of Supply
Priceelasticityof supplyequals
P
Q
S
P2
Q1
P1
P risesby 8%
Q risesby 16%
16%
8%= 2.0
Price elasticityof supply =
Percentage change in Qs
Percentage change in P
Example:
The Variety of Supply Curves
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
53/64
The Variety of Supply Curves
Economists classify supply curves
according to their elasticity.
The slope of the supply curve is closelyrelated to price elasticity of supply.
Rule of thumb:The flatter the curve, the bigger theelasticity.The steeper the curve, the smaller the
elasticity. The next 5 slides present the different
classifications, from least to most elastic.
P f tl i l ti
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
54/64
S
Perfectly inelastic (one extreme)
P
QQ1
P1
P2
Q changesby 0%
0%
10%
= 0Price elasticity
of supply
=% change in Q
% change in P
=
P risesby 10%
Sellers
price sensitivity:
Scurve:
Elasticity:
vertical
0
0
I l ti
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
55/64
S
Inelastic
P
QQ1
P1
Q2
P2
Q rises lessthan 10%
< 10%
10%
< 1Price elasticity
of supply
=% change in Q
% change in P
=
P risesby 10%
Sellers
price sensitivity:
Scurve:
Elasticity:
relatively steep
relatively low
< 1
U it l ti
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
56/64
S
Unit elastic
P
QQ1
P1
Q2
P2
Q risesby 10%
10%
10%
= 1Price elasticity
of supply
=% change in Q
% change in P
=
P risesby 10%
Sellers
price sensitivity:
Scurve:
Elasticity:
intermediate slope
intermediate
= 1
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
57/64
P f tl l ti (th th t )
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
58/64
S
Perfectly elastic (the other extreme)
P
Q
P1
Q1Pchanges
by 0%
Q changesby any %
any %
0%
= infinityPrice elasticity
of supply
=% change in Q
% change in P
=
Q2
P2=Sellers
price sensitivity:
Scurve:
Elasticity:
horizontal
extreme
infinity
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
59/64
A C T I V E L E A R N I N G 3:
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
60/64
ACTIVE LEARNING 3:Elasticity and changes in equilibrium
The supply of beachfront property isinelastic. The supply of new cars iselastic.
Suppose population growth causesdemand for both goods to double(at each price, Qddoubles).
For which product will Pchange themost?
For which product will Qchange themost?
60
A C T I V E L E A R N I N G 3:
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
61/64
ACTIVE LEARNING 3:Answers
61
Beachfrontproperty (inelastic
supply):P
Q
D1 D2S
Q1
P1 A
B
Q2
P2
When supplyis inelastic,
an increase in
demand has a
bigger impacton price than
on quantity.
A C T I V E L E A R N I N G 3:
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
62/64
ACTIVE LEARNING 3:Answers
62
New cars(elastic supply):
P
Q
D1 D2
S
Q1
P1
A
Q2
P2
B
When supplyis elastic,
an increase in
demand has a
bigger impacton quantity
than on price.
How the Price Elasticity of Supply Can Vary
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
63/64
S
How the Price Elasticity of Supply Can Vary
P
Q
Supply oftenbecomesless elasticas Qrises,
due tocapacitylimits.
$15
525
12
500
$3
100
4
200
elasticity> 1
elasticity< 1
8/10/2019 EMBA Sem I Managerial Economics Session3-Elasticity and Its Application (1)
64/64
Thank you
Recommended