ElasticityMicroeconomic FoundationAlaleh Mani2011

Points in Calculation Use only average due to its accuracy ای فاصله ،کشش نداریم ای نقطه کشش نداریم تقاضا منحنی اساس بر کشش نداریم هندسی کشش روش به محاسبه ∆Q/Qave = a proportionate of quantity demand (∆Q/Qave ) * 100 = Percentage [(∆Q/Qave ) * 100]/ [(∆P/Pave )*100 ]= units-free %∆Q / %∆P= elasticity Professor's Note: It is customary to use average values when

calculating percentage changes used in elasticity computations. This way a change from 8 to 10 and a change from 10 to 8 both result in the same percentage change of 2/9 = 22.2%. Use this method in the exam!

continue Elasticity is a responsiveness of demand to

price change=absolute value or its magnitude

Insulin =Perfectly Inelastic Food and housing= inelastic Automobile and furniture Two soft drinks with perfect substitution

=Perfectly elastic Transportation ,housing, energy elasticity

Total Revenue and Elasticity P cut, TR rise elastic demand , Q

rise>1% P cut, TR fall inelastic demand, Q

rise<1% P cut, TR fix elasticity=1 , Q rise=1%

Demand Curve and Total Revenue

The factors that influence on elasticity of Demand 1.degree of substitution -oil has none, oil is inelastic and In need -Personal computer inelastic -Dell or HP are Elastic -Vacation is Luxury have many substitution

one of them is “not buying them” so an Elastic 2.Income proportion- budget Gum is inelastic Housing is elastic

Food budget in 10 countries and elasticity

3.Time elapsed since Price changes Oil price rise, oil is

inelastic ,technology helps to less consume the oil, demand fall

PC price fall, inelastic, advertisement and knowledge , demand rise

4. Price

Cross Elasticity

%∆Q1 / %∆P2= elasticity 1 Far Close

(-) Substitution Small Large

Two items Complement Small Large

Unrelated Small CE≈0

Income Elasticity of Demand %∆Q / %∆I= income elasticity E=∞ E>1 Normal Good, Elastic 0<E<1 Normal Good, Inelastic E=0 E<0 Inferior Good and low income

consumers…potatoes, rice, motorcycle

Table 2

Income elasticity of food in 10 countries Necessity ------- food Luxury -----------Air line in Arica food is luxury

There is no standard graph for income/quantity relation

Supple Price Elasticity Van Gogh Painting EOS=0 Wheat, Beef, Sugar Linear supply curve passes the origin,

has E=1

The factors which influence the elasticity of supply Resource substitution the opportunity cost is constant wheat can be planted anywhere Van Gogh is unique Time Momentary Supply Fruit and plants E=0 , new decision takes time Long distance telephone E=∞, quick decision Long run Supply response to change of price in firms after all possible

changes Short run Supply respond to change with very first adjustment ,labor 0<E<1