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ELASTICITY

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.

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ELASTICITY

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

  2. Determinants of Price Elasticity of Demand Necessities versus Non-necessities Availability of Close Substitutes Definition of the Market Time Horizon

  3. Price Elasticity of Demand

  4. How to calculate the Price Elasticity of Demand i = initial and f = final

  5. Example If 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:

  6. How to Interpret Elasticity A price elasticity of –2 means that: if price increases by 1%, quantity demanded decreases by 2%.

  7. $5 A 25% increase in price... Demand 75 ...leads to a 25% decrease in quantity demanded. Unit Elastic Demand: Elasticity equals -1 Ed = %dQ %dP -.25 .25 = -1 Price $4 Quantity 100

  8. Elastic Demand: Elasticity is greater than –1 $5 A 25% increase in price... Demand 50 ...leads to a 50% decrease in quantity demanded. Ed = %dQ %dP = -.50 .25 = -2 Price 价格 $4 Quantity 100

  9. $5 A 25% increase in price... $4 Demand 90 ...leads to a 10% decrease in quantity demanded. Inelastic Demand: Elasticity is less than –1 Ed = %dQ %dP -.10 .25 = -.4 Price Quantity 100

  10. Elasticity and Total Revenue: Inelastic demand $5 A 25% increase in price... $4 Demand 90 100 ...leads to a 10% decrease in quantity demanded. P   Revenue increases Price Revenue = $450 Revenue = $400 Quantity

  11. Elasticity and Total Revenue: Elastic demand $5 A 25% increase in price... $4 Demand 50 100 ...leads to a 50% decrease in quantity demanded. P  Revenue decreases Price价格 Revenue = $250 Revenue = $400 Quantity

  12. Crude Oil Prices Nominal$Inflation-adjusted 2011 US$ $/barrel

  13. Supply: Crude Oil Production 000s barrels/day

  14. Estimating Demand Elasticity for Oil 1979-80 Year 1979 1980 Price $/barrel $20 $30 Quantity Barrels/day (millions) 64 56

  15. Effect of Decrease in Supply in Oil Market with Inelastic Demand When demand is inelastic, a decrease in supply... $/barrel S2 S1 leads to a large increase in price (50%) 30 Revenue= $1680 20 Revenue= $1280 Demand Barrels/day (millions) 0 56 64 and a proportionately smaller decrease (12.5%) in quantity sold.

  16. Effect of Decrease in Supply in Oil Market with Elastic Demand $/barrel When demand is elastic, a decrease in supply... S2 S1 leads to a small increase in price (10%) 22 Revenue = $1100 20 Revenue = $1280 Demand Barrels/day (millions) 0 50 64 and a proportionately larger decrease (22%) in quantity sold.

  17. Effect of Increase in Supply in Wheat Market with Inelastic Demand When demand is inelastic,an increase in supply... $/bushel S1 S2 leads to a large decrease in price (50%) 3 Revenue= $900 2 Revenue = $660 Demand 0 300 330 Bushels per day (millions) and a proportionately smaller increase (10%) in quantity sold.

  18. Supply $5 A 25% increase in price... 4 100 200 ...leads to a 100% increase in quantity supplied. Elastic SupplyElasticity is greater than 1 Price Es = %dQ %dP = 1.00 .25 = 4 Quantity

  19. Supply $5 A 25% increase in price... 4 100 110 ...leads to a 10% increase in quantity supplied. Inelastic SupplyElasticity is less than 1 Price Es = %dQ %dP = .10 .25 = 0.4 Quantity

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