Chapter 6 - Concept of Elasticity

7/24/2019 Chapter 6 - Concept of Elasticity

1/25

1

Chapter 6

Concept

ofElasticity


2/25

2

Chapter 6

Concept of Elasticity

Elasticity

- Measures the degree ofresponsiveness in the quantity per unit of

time to a change in any one of the factors of

demand and supply.

- The responsiveness of one variable

to changes in another.


3/25

3

When price rises, hat happens

to demand!

"emand falls

#$T%

&o much does demand fall!

Chapter 6

Concept of Elasticity


4/25

4

'f price rises by ()* - hat happens

to demand!

We +no demand ill fall#y more than ()*!

#y less than ()*!

Elasticity measures the etent to hich

demand ill change

Chapter 6Concept of Elasticity


5/25

5

Types Elasticity

rice Elasticity of "emandrice Elasticity of /upply

'ncome Elasticity of "emandCross Elasticity



6/25

6

rice Elasticity of "emand

- The sensitivity of quantity demanded

to price0 the percentage change in quantity

demanded caused by a (-percent change inprice.



7/25

7

The Formula:

ED=

% Change in Quantity Demanded___________________________

% Change in Price

Note: EDhas sign in front of it !ecause as "rice rises

demand falls and #ice$#ersa in#erse relationshi" !et&een"rice and demand'



8/25

8

1ive Types of Elasticity of "emand

(.'nelastic "emand

2.erfectly 'nelastic "emand

3.Elastic "emand

.erfectly Elastic "emand4.$nitary Elastic "emand



9/25

9

'nelastic "emand

- 5 price elasticity of demand beteen )

and (

- Inelastic demand means that thepercentage change in quantity demanded ill be

smallerthan the percentage change in price.

uantity demanded is not very sensitive to price.



10/25

10


'nelastic "emand

()

4

4 6


11/25

11


erfectly 'nelastic "emand

- 5 price elasticity of demand equal to ).

- 5n etreme case of inelastic demand

occurs hen a change in price causes

absolutely no change in quantity demanded

at all.


12/25

12


erfectly 'nelastic "emand

6

4

4

7

8


13/25

13


Elastic "emand

- 5 price elasticity of demand less than (.

- Elastic demand means that the

percentage change in quantity demanded illbe largerthan the percentage change in price.

uantity demanded is sensitiveto price.


14/25

14


Elastic "emand

7

4

4 2)


15/25

15


erfectly Elastic "emand

- 5 price elasticity of demandapproaching minus infinity.

- 5n etreme case of elastic demandoccurs hen even the tiniest change in price

causes a huge change in quantity demanded,

so huge that, for all intents and purposes, e

call the response infinite.


16/25

16



6

4

4

7

8

2)(4() 24


17/25

17


$nitary Elastic "emand

- 5 price elasticity of demand equal to (.

- "emand for the good is eactly at the

boundary beteen elastic and inelastic.


18/25

18



()

4

()

(4

2)

242)(4 3)


19/25

19


Elasticity and Total 9evenue

T9 :

Where demand is price inelastic, total revenue moves

in the same direction as price. Where demand is elastic, total

spending moves in the opposite direction as price. Finally,

where demand is unitary elastic, total revenue remains the

same as price changes.


20/25

20


Effects of rice Changes on Ependiture


21/25

21


Type;umerical


22/25

22


$sing rice Elasticity of "emand

The War on "rugs


23/25

23


The #asic rinciple of olicy Tradeoffs

olicy Tradeoffs

=overnment policy is constrained by the

reaction of private decision ma+ers. 5s a result,

policy ma+ers face tradeoffs> ma+ing progress toard

one goal often requires some sacrifice of another

goal.


24/25

?'f you can@t eplain it simply,you don@t understand it ellenough.A

- 5lbert Einstein

24


25/25

Endof

resentation25

Bapdp

Documents

Chapter 6 - Concept of Elasticity