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1、,Elasticity and Its Application,Chapter 5,Copyright 2001 by Harcourt,Inc.All rights reserved.Requests for permission to make copies of any part of thework should be mailed to:Permissions Department,Harcourt College Publishers,6277 Sea Harbor Drive,Orlando,Florida 32887-6777.,Elasticity.,is a measure
2、 of how much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater precision.,Price Elasticity of Demand,Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.It is a measure of how much t
3、he quantity demanded of a good responds to a change in the price of that good.,Determinants of Price Elasticity of Demand,Necessities versus LuxuriesAvailability of Close SubstitutesDefinition of the MarketTime Horizon,Determinants of Price Elasticity of Demand,Demand tends to be more elastic:if the
4、 good is a luxury.the longer the time period.the larger the number of close substitutes.the more narrowly defined the market.,Computing the Price Elasticity of Demand,The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in pric
5、e.,Computing the Price Elasticity of Demand,Example:If the price of an ice cream cone increases from$2.00 to$2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:,Computing the Price Elasticity of Demand Using the Midpoint Formula,The midpoint fo
6、rmula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.,Computing the Price Elasticity of Demand,Example:If the price of an ice cream cone increases from$2.00 to$2.20 and the amount you buy falls from 10 to 8 con
7、es the your elasticity of demand,using the midpoint formula,would be calculated as:,Ranges of Elasticity,Inelastic DemandQuantity demanded does not respond strongly to price changes.Price elasticity of demand is less than one.Elastic DemandQuantity demanded responds strongly to changes in price.Pric
8、e elasticity of demand is greater than one.,Computing the Price Elasticity of Demand,Demand is price elastic,$5,4,Demand,Quantity,100,0,Price,50,Ranges of Elasticity,Perfectly InelasticQuantity demanded does not respond to price changes.Perfectly ElasticQuantity demanded changes infinitely with any
9、change in price.Unit ElasticQuantity demanded changes by the same percentage as the price.,A Variety of Demand Curves,Because the price elasticity of demand measures how much quantity demanded responds to the price,it is closely related to the slope of the demand curve.,Perfectly Inelastic Demand-El
10、asticity equals 0,Quantity,Price,2.leaves the quantity demanded unchanged.,Inelastic Demand-Elasticity is less than 1,Quantity,Price,Unit Elastic Demand-Elasticity equals 1,Quantity,Price,Elastic Demand-Elasticity is greater than 1,Quantity,Price,Perfectly Elastic Demand-Elasticity equals infinity,Q
11、uantity,Price,Elasticity and Total Revenue,Total revenue is the amount paid by buyers and received by sellers of a good.Computed as the price of the good times the quantity sold.TR=P x Q,$4,Demand,Quantity,P,0,Price,P x Q=$400,(total revenue),100,Elasticity and Total Revenue,Elasticity and Total Rev
12、enue,With an inelastic demand curve,an increase in price leads to a decrease in quantity that is proportionately smaller.Thus,total revenue increases.,Elasticity and Total Revenue:Inelastic Demand,$3,Quantity,0,Price,80,Revenue=$240,Demand,$1,Demand,Quantity,0,Revenue=$100,100,Price,An increase in p
13、rice from$1 to$3.,leads to an increase in total revenue from$100 to$240,Elasticity and Total Revenue,With an elastic demand curve,an increase in the price leads to a decrease in quantity demanded that is proportionately larger.Thus,total revenue decreases.,Elasticity and Total Revenue:Elastic Demand
14、,Demand,Quantity,0,Price,$4,50,Demand,Quantity,0,Price,Revenue=$100,$5,20,An increase in price from$4 to$5.,leads to a decrease in total revenue from$200 to$100,Computing the Elasticity of a Linear Demand Curve,Income Elasticity of Demand,Income elasticity of demand measures how much the quantity de
15、manded of a good responds to a change in consumers income.It is computed as the percentage change in the quantity demanded divided by the percentage change in income.,Computing Income Elasticity,Income Elasticity-Types of Goods-,Normal GoodsInferior GoodsHigher income raises the quantity demanded fo
16、r normal goods but lowers the quantity demanded for inferior goods.,Income Elasticity-Types of Goods-,Goods consumers regard as necessities tend to be income inelasticExamples include food,fuel,clothing,utilities,and medical services.Goods consumers regard as luxuries tend to be income elastic.Examp
17、les include sports cars,furs,and expensive foods.,Price Elasticity of Supply,Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.It is a measure of how much the quantity supplied of a good responds to a change in the price of that good.,R
18、anges of Elasticity,Perfectly ElasticES=Relatively ElasticES 1Unit ElasticES=1,Ranges of Elasticity,Relatively InelasticES 1Perfectly InelasticES=0,Perfectly Inelastic Supply-Elasticity equals 0,Quantity,Price,2.leaves the quantity supplied unchanged.,Inelastic Supply-Elasticity is less than 1,Quant
19、ity,Price,Unit Elastic Supply-Elasticity equals 1,Quantity,Price,Elastic Supply-Elasticity is greater than 1,Quantity,Price,Perfectly Elastic Supply-Elasticity equals infinity,Quantity,Price,Determinants of Elasticity of Supply,Ability of sellers to change the amount of the good they produce.Beach-f
20、ront land is inelastic.Books,cars,or manufactured goods are elastic.Time period.Supply is more elastic in the long run.,Computing the Price Elasticity of Supply,The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.,App
21、lication 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 hybridthat is more productive than existing varieties?,Application of Elasticity,Examine whether the supply or demand curve
22、 shifts.Determine the direction of the shift of the curve.Use the supply-and-demand diagram to see how the market equilibrium changes.,An Increase in Supply in the Market for Wheat,$3,Quantity of Wheat,100,0,Price ofWheat,Demand,S1,Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.
23、,3.and a proportionately smallerincrease in quantity sold.As a result,revenue falls from$300 to$220.,An Increase in Supply in the Market for Wheat,$3,Quantity of Wheat,100,0,Price ofWheat,1.When demand is inelastic,an increase in supply.,Demand,S1,S2,2,110,2.leadsto a large fall in price.,Harcourt,I
24、nc.items and derived items copyright 2001 by Harcourt,Inc.,Compute Elasticity,Compute Elasticity,Demand is inelastic,Summary,Price elasticity of demand measures how much the quantity demanded responds to changes in the price.If a demand curve is elastic,total revenue falls when the price rises.If it
25、 is inelastic,total revenue rises as the price rises.,Summary,The price elasticity of supply measures how much the quantity supplied responds to changes in the price.In most markets,supply is more elastic in the long run than in the short run.,Computing the Price Elasticity of Demand,Perfectly Inela
26、stic Demand-Elasticity equals 0,Inelastic Demand-Elasticity is less than 1,Unit Elastic Demand-Elasticity equals 1,Elastic Demand-Elasticity is greater than 1,Perfectly Elastic Demand-Elasticity equals infinity,Elasticity and Total Revenue,Elasticity and Total Revenue:Inelastic Demand,Elasticity and
27、 Total Revenue:Elastic Demand,Perfectly Inelastic Supply-Elasticity equals 0,Inelastic Supply-Elasticity is less than 1,Unit Elastic Supply-Elasticity equals 1,Elastic Supply-Elasticity is greater than 1,Perfectly Elastic Supply-Elasticity equals infinity,An Increase in Supply in the Market for Wheat,Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.,An Increase in Supply in the Market for Wheat,Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.,
