ELASTICITY How quantity demanded or supplied changes with changes in price.

ELASTICITY

How quantity demanded or supplied changes with changes in price

Determinants of Price Elasticity of Demand

Necessities versus Non-necessities

Availability of Close Substitutes

Definition of the Market

Time Horizon

Price Elasticity of Demand

pricein change Percentage

ddemandequantity in change PercentageEd

dP %

dQ %Ed

How to calculate the Price Elasticity of Demand

i

if

i

if

PPP

QQQ

dP %

dQ %

i = initial and f = final

ExampleIf the price of a unit of the good increases from $4 to $5 and the amount you buy falls from 100 to 50 units/week then your elasticity of demand would be calculated as:

2.25

50.

44)(5

100100)(50

PiPi - Pf

QiQi - Qf

How to Interpret Elasticity

A price elasticity of –2 means that: if price increases by 1%, quantity demanded decreases by 2%.

Unit Elastic Demand: Elasticity equals -1

Quantity

Price

$5A 25%increasein price...

Demand

75...leads to a 25% decrease in quantity demanded.

100

$4

Ed = %dQ %dP

-.25 .25

= -1

Elastic Demand: Elasticity is greater than –1

Quantity

Price价格


Demand


100

$4

Ed = %dQ %dP = -.50

.25 = -2

Inelastic Demand: Elasticity is less than –1

Quantity

Price

$4


Demand


100

Ed = %dQ %dP -.10 .25 = -.4

Elasticity and Total Revenue: Inelastic demand

Quantity

Price

$4


Demand


P Revenue increases

Revenue = $400

Revenue = $450

Elasticity and Total Revenue: Elastic demand

Quantity

Price价格

$4


Demand


P Revenue decreases

Revenue = $400

Revenue = $250

Crude Oil Prices $/

bar

rel

Nominal $ Inflation-adjusted 2011 US$

Supply: Crude Oil Production

000s

bar

rels

/day

0.25.5

125.

2020) - (30

6464)(56

P%

Q%

Estimating Demand Elasticity for Oil1979-80

Year

19791980

Price$/barrel

$20 $30

QuantityBarrels/day (millions)

64 56

and a proportionately smaller decrease (12.5%) in quantity sold.

Effect of Decrease in Supply in Oil Market with Inelastic Demand

30

Barrels/day (millions) 560

$/barrel When demand is inelastic, a decrease in supply...

Demand

S2 S1

20

64

leadsto a large increase in price (50%)

Revenue= $1280

Revenue = $1680

and a proportionately larger decrease (22%) in quantity sold.

Effect of Decrease in Supply in Oil Market with Elastic Demand

22

Barrels/day (millions)

500

$/barrel When demand is elastic, a decrease in supply...

Demand

S2 S1

20

64

leadsto a small increase in price (10%) Revenue = $1280

Revenue = $1100

and a proportionately smaller increase (10%) in quantity sold.

Effect of Increase in Supply in Wheat Market with Inelastic Demand

3

Bushels per day (millions) 3000

$/bushelWhen demand is inelastic,an increase in supply...

Demand

S1

S2

2

330

leadsto a large decrease in price (50%)

Revenue= $900

Revenue = $660

Elastic SupplyElasticity is greater than 1

Quantity

Price

4


200100

Supply

...leads to a 100% increase in quantity supplied.

Es = %dQ %dP = 1.00 .25 = 4

Inelastic SupplyElasticity is less than 1

Quantity

Price

4


110100

Supply

...leads to a 10% increase in quantity supplied.

Es = %dQ %dP = .10 .25 = 0.4

ELASTICITY How quantity demanded or supplied changes with changes in price.

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