Ch05mic-Elasticity.ppt

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Chapter 5Chapter 5Chapter 5Chapter 5

Elasticity and itsApplicationsElasticity and itsApplications

2002 by Nelson, a division of Thomson Canada Limited2002 by Nelson, a division of Thomson Canada Limited


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Learn the meaning of the elasticity ofdemand

E!amine "hat determines the elasticity ofdemand

Learn the meaning of the elasticity ofs#pply

E!amine "hat determines the elasticity ofs#pply

Apply the concept of elasticity in threedifferent mar$ets

Learn the meaning of the elasticity ofdemand

E!amine "hat determines the elasticity ofdemand

Learn the meaning of the elasticity ofs#pply

E!amine "hat determines the elasticity ofs#pply

Apply the concept of elasticity in threedifferent mar$ets

%n this chapter yo# "ill&%n this chapter yo# "ill&


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& allo"s #s to analy'e s#pply anddemand "ith greater precision

& is a meas#re of ho" m#ch b#yers andsellers respond to changes in mar$etconditions

& allo"s #s to analy'e s#pply anddemand "ith greater precision

& is a meas#re of ho" m#ch b#yers andsellers respond to changes in mar$etconditions

T(E ELA)T%C%T* + -E.AN-T(E ELA)T%C%T* + -E.AN-


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Price elasticity of demandis a meas#re ofho" m#ch the /#antity demanded of agood responds to a change in the price ofthat good

rice elasticity of demand is thepercentage change in /#antity demandedgiven a percent change in the price

Price elasticity of demandis a meas#re ofho" m#ch the /#antity demanded of agood responds to a change in the price ofthat good

rice elasticity of demand is thepercentage change in /#antity demandedgiven a percent change in the price

rice Elasticity of -emandrice Elasticity of -emand


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Availability of Close )#bstit#tes Necessities versusL#!#ries

-efinition of the .ar$et

Time (ori'on

Availability of Close )#bstit#tes Necessities versusL#!#ries

-efinition of the .ar$et

Time (ori'on

The rice Elasticity of -emand and %tsThe rice Elasticity of -emand and %ts

-eterminants-eterminants


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-emand tends to be more elastic1! the larger the n#mber of close

s#bstit#tes

! if the good is a l#!#ry! the more narro"ly defined the mar$et

! the longer the time period

-emand tends to be more elastic1! the larger the n#mber of close

s#bstit#tes

!if the good is a l#!#ry! the more narro"ly defined the mar$et

! the longer the time period

The rice Elasticity of -emand and %tsThe rice Elasticity of -emand and %ts



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The price elasticity of demand iscomp#ted as the percentage change in the/#antity demanded divided by thepercentage change in price

The price elasticity of demand iscomp#ted as the percentage change in the/#antity demanded divided by thepercentage change in price

Comp#ting the rice Elasticity of -emandComp#ting the rice Elasticity of -emand

rice elasticity of demand

ercentage change in /#antity demanded

ercentage change in price


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The midpoint form#la is preferable "hencalc#lating the price elasticity of demandbeca#se it gives the same ans"erregardless of the direction of the change

point .ethod1 A 3etter 4ay to Calc#late ercentageChanges and Elasticities

The midpoint form#la is preferable "hencalc#lating the price elasticity of demandbeca#se it gives the same ans"erregardless of the direction of the change

point .ethod1 A 3etter 4ay to Calc#late ercentageChanges and Elasticities

The .idpoint .ethod1 A 3etter 4ay toThe .idpoint .ethod1 A 3etter 4ay to

Calc#late ercentage Changes and ElasticitiesCalc#late ercentage Changes and Elasticities

62 7 689: ;62 < 689: 2=

2 7 89: ;2 < 89: 2=rice elasticity of demand


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rom oint A to oint 31 rice rise 50> and 6#antity fall ??>

rom oint 3 to oint A1 rice fall ??> and 6#antity rise 50>

rom oint A to oint 31 rice rise 50> and 6#antity fall ??>

rom oint 3 to oint A1 rice fall ??> and 6#antity rise 50>

The .idpoint .ethod1 A 3etter 4ay toThe .idpoint .ethod1 A 3etter 4ay to

Calc#late ercentage Changes and ElasticitiesCalc#late ercentage Changes and Elasticities

@0 7 8209 :;@0 < 8209: 2=

7 B9: ; < B9: 2=rice elasticity of demand

oint A1 rice B 6#antity 820 oint 31 rice 6#antity @0

oint A1 rice B 6#antity 820 oint 31 rice 6#antity @0

8.id point method


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%nelastic -emand! 6#antity demanded does not respond

strongly to price changes

! rice elasticity of demand is less thanone

Elastic -emand

! 6#antity demanded responds stronglyto changes in price

! rice elasticity of demand is greaterthan one

%nelastic -emand! 6#antity demanded does not respond

strongly to price changes

!rice elasticity of demand is less thanone

Elastic -emand

! 6#antity demanded responds strongly

to changes in price

! rice elasticity of demand is greaterthan one

A Dariety of -emand C#rvesA Dariety of -emand C#rves


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erfectly %nelastic! 6#antity demanded does not respond to

price changes

erfectly Elastic! 6#antity demanded changes infinitely

"ith any change in price

nit Elastic

! 6#antity demanded changes by thesame percentage as the price

erfectly %nelastic! 6#antity demanded does not respond to

price changes

erfectly Elastic! 6#antity demanded changes infinitely

"ith any change in price

nit Elastic

! 6#antity demanded changes by thesame percentage as the price



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3eca#se the price elasticity of demandmeas#res ho" m#ch /#antity demandedresponds to the price, it is closely relatedto the slope of the demand c#rve

3eca#se the price elasticity of demandmeas#res ho" m#ch /#antity demandedresponds to the price, it is closely relatedto the slope of the demand c#rve



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E 0

& 6#antity

rice -emand

%&&

%. 'n increasein price(

)4.&&

)5.&&

2. (lea*es the +antit- demanded nchanged.

ig#re 578 a91 erfectly %nelastic -emandig#re 578 a91 erfectly %nelastic -emand


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E F 8

& 6#antity

rice

%&&

%. ' 22increase inprice(

)5.&&

2. ( /eads to a %% decrease in +antit- demanded.

0emand

)4.&&

$&

ig#re 578 b91 %nelastic -emandig#re 578 b91 %nelastic -emand


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E 8

& 6#antity

rice

%&&


)5.&&

2. ( /eads to a 22 decrease in +antit- demanded.

0emand

)4.&&

#&

ig#re 578 c91 nit Elastic -emandig#re 578 c91 nit Elastic -emand


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E G 8

& 6#antity

rice

%&&


)5.&&

2. ( /eads to a " decrease in +antit- demanded.

0emand

)4.&&

5&

ig#re 578 d91 Elastic -emandig#re 578 d91 Elastic -emand


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E

&6#antity

rice

2. 't e1actl- )4, consmers will - an- +antit-.

)4.&& 0emand

%. 't an- price ao*e )4, +antit-

demanded is ero.

3. 't an- price elow )4, +antit- demanded is infinite.

ig#re 578 e91 erfectly Elastic -emandig#re 578 e91 erfectly Elastic -emand


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Total revenueis the amo#nt paid byb#yers and received by sellers of a good

Comp#ted as the price of the good timesthe /#antity sold

TH ! 6

Total revenueis the amo#nt paid byb#yers and received by sellers of a good

Comp#ted as the price of the good timesthe /#antity sold

TH ! 6

Total Heven#e and the rice Elasticity ofTotal Heven#e and the rice Elasticity of

-emand-emand


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rice

6#antity& %&&

0emand

P 1 Q = )4&&

re*ene

)4.&&

ig#re 5721 Total Heven#eig#re 5721 Total Heven#e


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rice

6#antity& #&

0emand

)3.&&

P 1 Q = )4&&re*ene

P 1 Q = )%&& re*ene

)%.&&

%&&

ig#re 57?1 (o" Total Heven#e Changesig#re 57?1 (o" Total Heven#e Changes

4hen rices Changes1 %nelastic -emand4hen rices Changes1 %nelastic -emand


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rice

6#antity

Change in Total Heven#e "hen rice Changes

& 5&

0emand

)4.&&

)5.&&

2&

6e*ene 7 )%&&

6e*ene 7 )2&&

ig#re 57B1 (o" Total Heven#e Changesig#re 57B1 (o" Total Heven#e Changes

4hen rices Changes1 Elastic -emand4hen rices Changes1 Elastic -emand


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4ith an elastic demand c#rve, an increasein the price leads to a decrease in /#antitydemanded that is proportionately largerTh#s, total revenue decreases.

4ith an elastic demand c#rve, an increasein the price leads to a decrease in /#antitydemanded that is proportionately largerTh#s, total revenue decreases.

Elasticity and Total Heven#e along a LinearElasticity and Total Heven#e along a Linear

-emand C#rve-emand C#rve


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Table 578 Elasticity and Total Heven#e alongTable 578 Elasticity and Total Heven#e along

a Linear -emand C#rvea Linear -emand C#rve


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rice

6#antity2 B @ 80 820

5

B

?

2

8

I

8B

Elasticit-is largerthan %.

Elasticit-is smallerthan %.

ig#re 5751 A Linear -emand C#rveig#re 5751 A Linear -emand C#rve


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Income elasticity of demandmeas#resho" m#ch the /#antity demanded of agood responds to a change in cons#mersJincome

%t is comp#ted as the percentage changein the /#antity demanded divided by thepercentage change in income

Income elasticity of demandmeas#resho" m#ch the /#antity demanded of agood responds to a change in cons#mersJincome

%t is comp#ted as the percentage changein the /#antity demanded divided by thepercentage change in income

+ther -emand Elasticities+ther -emand Elasticities

Income elasticity of demand =

Percentage changein quantity demanded

Percentage changein income


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Types of Koods! Normal Koods

! %nferior Koods

(igher income raises the /#antitydemanded for normal goods b#t lo"ersthe /#antity demanded for inferior goods

Types of Koods! Normal Koods

! %nferior Koods

(igher income raises the /#antitydemanded for normal goods b#t lo"ersthe /#antity demanded for inferior goods



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Koods cons#mers regard as necessitiestend to be income inelastic

! E!amples incl#de food, f#el, clothing,#tilities, and medical services

Koods cons#mers regard as l#!#ries tendto be income elastic

! E!amples incl#de sports cars, f#rs, and

e!pensive foods

Koods cons#mers regard as necessitiestend to be income inelastic

! E!amples incl#de food, f#el, clothing,#tilities, and medical services

Koods cons#mers regard as l#!#ries tendto be income elastic

! E!amples incl#de sports cars, f#rs, and

e!pensive foods



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Cross-Price elasticity of demandmeas#resho" m#ch the /#antity demanded of agood responds to a change in the price ofanother good

%t is comp#ted as the percentage change inthe /#antity demanded divided by thepercentage change in the price of thesecond good

Cross-Price elasticity of demandmeas#res

ho" m#ch the /#antity demanded of agood responds to a change in the price ofanother good

%t is comp#ted as the percentage change in

the /#antity demanded divided by thepercentage change in the price of thesecond good


Income elasticity of demand =

Percentage changein quantity demanded

Percentage changeinthe price of

good 2.


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Price elasticity of supplyis a meas#re ofho" m#ch the /#antity s#pplied of a goodresponds to a change in the price of thatgood

rice elasticity of s#pply is the percentagechange in /#antity s#pplied given apercent change in the price

Price elasticity of supplyis a meas#re ofho" m#ch the /#antity s#pplied of a goodresponds to a change in the price of thatgood

rice elasticity of s#pply is the percentagechange in /#antity s#pplied given apercent change in the price

H%CE ELA)T%C%T* + )L*H%CE ELA)T%C%T* + )L*


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Ability of sellers to change the amo#nt ofthe good they prod#ce

! 3each7front land is inelastic

! 3oo$s, cars, or man#fact#red goods areelastic

Time period

! )#pply is more elastic in the long r#n

Ability of sellers to change the amo#nt ofthe good they prod#ce

! 3each7front land is inelastic

! 3oo$s, cars, or man#fact#red goods areelastic

Time period

! )#pply is more elastic in the long r#n

The rice Elasticity of )#pply and %tsThe rice Elasticity of )#pply and %ts



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The price elasticity of s#pply is comp#tedas the percentage change in the /#antitys#pplied divided by the percentagechange in price

The price elasticity of s#pply is comp#tedas the percentage change in the /#antitys#pplied divided by the percentagechange in price

Comp#ting the rice Elasticity of )#pplyComp#ting the rice Elasticity of )#pply

Price elasticity of supply =

Percentage changein quantity supplied

Percentage change in price


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& #sing the midpoint method, "e calc#late the percent change inthe price as 280 7 809 : 200 ! 800 80>

)imilarly, "e calc#late the percent change in the /#antity s#ppliedas 88 000 7 0009 : 80 000 ! 800 20>

& #sing the midpoint method, "e calc#late the percent change inthe price as 280 7 809 : 200 ! 800 80>

)imilarly, "e calc#late the percent change in the /#antity s#ppliedas 88 000 7 0009 : 80 000 ! 800 20>

20>rice elasticity of s#pply

)#ppose an increase in the price of mil$ from 80 to 280 a litre raisesthe amo#nt that dairy farmers prod#ce from 000 to 88 000 L per month&

)#ppose an increase in the price of mil$ from 80 to 280 a litre raisesthe amo#nt that dairy farmers prod#ce from 000 to 88 000 L per month&

20

Comp#ting the rice Elasticity of )#pplyComp#ting the rice Elasticity of )#pply

80>


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E 0

& 6#antity

rice

8ppl-

%. 'n increasein price(

)5.&&

2. (lea*es the +antit- spplied nchanged.

%&&

)4.&&

ig#re 57 a91 erfectly %nelastic )#pplyig#re 57 a91 erfectly %nelastic )#pply


34/46

E F 0

& 6#antity

rice

8ppl-

%&&


)5.&&

2. (leads to a %& increase in +antit-spplied.

)4.&&

%%&

ig#re 57 b91 %nelastic )#pplyig#re 57 b91 %nelastic )#pply


35/46

E 8

& 6#antity

rice

8ppl-

%&&


)5.&&

2. (leads to a 22 increase in +antit-spplied.

)4.&&

%25

ig#re 57 c91 nit Elastic )#pplyig#re 57 c91 nit Elastic )#pply


36/46

E G 8

& 6#antity

rice

8ppl-

%&&


)5.&&

2. (leads to a " increase in +antit-spplied.

)4.&&

2&&

ig#re 57 d91 Elastic )#pplyig#re 57 d91 Elastic )#pply


37/46

E

&6#antity

rice

2. 't e1actl- )4, prodcers will sppl- an- +antit-.

)4.&& 8ppl-

%. 't an- price ao*e )4, +antit-

spplied is infinite.

3. 't an- price elow )4, +antit- spplied is ero.

ig#re 57 e91 erfectly Elastic )#pplyig#re 57 e91 erfectly Elastic )#pply


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&6#antity

rice

)3

%&&

)4

2&&

)%2

5&&

)%5

525

Elasticit- isgreater than %

Elasticit- is lessthan %

ig#re 57I1ig#re 57I1 (o" the price elasticity of s#pply(o" the price elasticity of s#pply

can varycan vary

T(HEE A %CAT%+N) + ) *


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Kood ne"s bad ne"s for farmers

+EC

-r#gs and crime

Kood ne"s bad ne"s for farmers

+EC

-r#gs and crime

T(HEE AL%CAT%+N) + )L*,T(HEE AL%CAT%+N) + )L*,

-E.AN-, AN- ELA)T%C%T*-E.AN-, AN- ELA)T%C%T*


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%ncrease in )#pply

0emand

8%

)3

6#antity of 4heat

rice of

4heat

82

2. ( leadsto a fall inprice(

3. (and a proportionatel- smaller increase in +antit- sold. 's a reslt re*ene

falls from )3&& to )22&.

%. 9hen demand is inelastic, anincrease in sppl-(

880800

)2

ig#re 57@1ig#re 57@1 An %ncrease in )#pply in theAn %ncrease in )#pply in the

.ar$et for 4heat.ar$et for 4heat


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0emand

8%

6#antity of +il

riceof +il

82

%. n the short rn, when sppl-and demand are inelastic, a shiftin sppl-(

2. ( leadsto a largeincrease inprice(

P1

P2

0emand

8%

6#antity of +il

82

%. n the long rn, when sppl-and demand are elastic, a shift insppl-(

2. ( leadsto a smallincrease inprice(

P1

P2

riceof +il

a9 +il .ar$et in the )hort H#n b9 +il .ar$et in the Long H#n

ig#re 571ig#re 571 A Hed#ction in )#pply in theA Hed#ction in )#pply in the

4orld .ar$et for +il4orld .ar$et for +il


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0emand

8%

6#antity of -r#gs

rice of

-r#gs82

%. 0rg interdiction redces thesppl- of drgs(

2. ( whichraises theprice(

P1

P2

0%

8,ppl-

%. 0rg edcation redces thedemand for drgs(

2. ( which

redces theprice(

a9 -r#g %nterdiction b9 -r#g Ed#cation

Q1

Q2

3. ( and redces the

+antit- sold.

Q2

3. ( and redces the +antit-

sold.

6#antity of -r#gs

rice of

-r#gs

02

P1

Q1

P2

ig#re 57801ig#re 57801 olicies to Hed#ce the of %llegalolicies to Hed#ce the of %llegal

-r#gs-r#gs


43/46

rice elasticity of demand meas#res ho" m#chthe /#antity demanded responds to changes inthe price

rice elasticity of demand is calc#lated as the

percentage change in /#antity demanded dividedby the percentage change in price

%f a demand c#rve is elastic, total reven#e falls"hen the price rises

%f it is inelastic, total reven#e rises as the pricerises

rice elasticity of demand meas#res ho" m#chthe /#antity demanded responds to changes inthe price

rice elasticity of demand is calc#lated as thepercentage change in /#antity demanded dividedby the percentage change in price

%f a demand c#rve is elastic, total reven#e falls"hen the price rises

%f it is inelastic, total reven#e rises as the pricerises

)#mmary)#mmary


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The income elasticity of demand meas#res ho"m#ch the /#antity demanded responds tochanges in cons#mersJ income

The cross7price elasticity of demand meas#res

ho" m#ch the /#antity demanded of one goodresponds to the price of another good

The price elasticity of s#pply meas#res ho"m#ch the /#antity s#pplied responds to changesin the price

The income elasticity of demand meas#res ho"m#ch the /#antity demanded responds tochanges in cons#mersJ income

The cross7price elasticity of demand meas#resho" m#ch the /#antity demanded of one goodresponds to the price of another good

The price elasticity of s#pply meas#res ho"m#ch the /#antity s#pplied responds to changesin the price

)#mmary)#mmary


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%n most mar$ets, s#pply is more elastic in thelong r#n than in the short r#n

The price elasticity of s#pply is calc#lated as thepercentage change in /#antity s#pplied divided

by the percentage change in price The tools of s#pply and demand can be applied in

many different types of mar$ets

%n most mar$ets, s#pply is more elastic in thelong r#n than in the short r#n

The price elasticity of s#pply is calc#lated as thepercentage change in /#antity s#pplied dividedby the percentage change in price

The tools of s#pply and demand can be applied inmany different types of mar$ets

)#mmary)#mmary


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The EndThe End

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Ch05mic-Elasticity.ppt