Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition...
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity . . .
… is a measure of how much buyers
and sellers respond to changes in
market conditions. . .
… allows us to analyze supply and
demand with greater precision.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity: A General Definition:
The percentage (%) change in
something . . .
. . . given a one percent (1%) change
in something else.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Price Elasticity of Demand
The percentage change in the quantity
demanded given. . .
. . . a one percent change in the price.
A
B
DemandP
Q
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Ranges of Elasticity . . .
Perfectly Inelastic Consumers are
“completely unresponsive” to price changes.
Perfectly Elastic Consumers are “extremely
responsive” to price changes.
Unit Elastic Response is “equal to” change in
price.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Demand Illustrated
Perfectly Inelastic
P2
P1
Even if priceincreases a lot quantity demanded stays the same.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity of Demand Illustrated
Perfectly Elastic
P1
A small increasein price will causedemand to drop offcompletely.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Computing Elasticity Coefficient
Computed as the percentage change in the quantity demanded divided by the percentage change in price.
Price Elasticityof Demand
=
Percentage Change in Quantity Demanded
Percentage Change in Price
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED
($2.20 - $2.00) / $2.00
(8 - 10) / 10
=
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity and Total Revenue
ED > 1 then
P Q TRand
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Elasticity and Total Revenue
ED < 1 then
P Q TRand
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Income Elasticity of Demand
The percentage change in the quantity demanded
given a one percent change in income.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Computing Income Elasticity
Computed as the percentage change in demand divided by the percentage change in Income.
Income Elasticityof Demand
=
Percentage Change in Demand
Percentage Change in Income
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Income Elasticity... Types
YD > 0 Normal Goods
YD < 0 Inferior Goods
YD = 0 Income-neutral Goods
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Price Elasticity of Supply
The percentage change in
quantity supplied
resulting from a one (1) percent change in price.
Price
Quantity
A
B
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Determinants of Elasticity of Supply
Flexibility or ability of sellers to change the amount of the good they produce.– Beachfront land vs. books, cars,
manufactured goods, etc.
– More elastic in the long run.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Computing Elasticity Coefficient
Computed as the percentage change in the quantity supplied divided by the percentage change in price.
Elasticityof Supply
=
Percentage Change in Quantity Supplied
Percentage Change in Price
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Applications of Elasticity
“Can Good News for Farming Be Bad News For Farmers?”
What happens to wheat farmers and the market for wheat when university agronomists discover a new wheat hybrid that is more productive than existing varieties?
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Apply Comparative Statics
Examine whether the supply or demand curve shifts.
Consider the direction the curve shifts.Use supply-and-demand diagrams to
see how the market equilibrium changes. Consider the state of elasticity.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Consider which direction the curve shifts.
SA
DA
Price
Quantity
$4.00
2000
SB
Technologycauses an increasein supply.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Compute Elasticity
ED =(2400 - 2000) / (2000)
($2.60 - $4.00) / ($4.00)
ED = 0.57 (Inelastic)
Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition
Observe the Change in Total Revenue
SA
DA
Price
Quantity
$4.00
2000
SB
2400
$2.60
TRSA = $8,000
TRSB = $5,760!