1 / 26

Chapter 6: Elasticity

Chapter 6: Elasticity. Elasticity. A measure of the responsiveness of one variable (usually quantity demanded or supplied) to a change in another variable Most commonly used elasticity: price elasticity of demand, defined as:. Price elasticity of demand =. Price elasticity of demand.

nhu
Download Presentation

Chapter 6: Elasticity

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 6: Elasticity

  2. Elasticity • A measure of the responsiveness of one variable (usually quantity demanded or supplied) to a change in another variable • Most commonly used elasticity: price elasticity of demand, defined as: Price elasticity of demand =

  3. Price elasticity of demand • Demand is said to be: • elastic when Ed > 1, • unit elastic when Ed = 1, and • inelastic when Ed < 1.

  4. Perfectly elastic demand

  5. Perfectly inelastic demand

  6. Elasticity & slope • a price increase from $1 to $2 represents a 100% increase in price, • a price increase from $2 to $3 represents a 50% increase in price, • a price increase from $3 to $4 represents a 33% increase in price, and • a price increase from $10 to $11 represents a 10% increase in price. • Notice that, even though the price increases by $1 in each case, the percentage change in price becomes smaller when the starting value is larger.

  7. Elasticity along a linear demand curve

  8. Elasticity along a linear demand curve

  9. Arc elasticity measure where:

  10. Example • Suppose that quantity demanded falls from 60 to 40 when the price rises from $3 to $5. The arc elasticity measure is given by: In this interval, demand is inelastic (since elasticity < 1).

  11. Elasticity and total revenue • Total revenue = price x quantity • What happens to total revenue if the price rises? Price elasticity of demand =

  12. Elasticity and TR (cont.) • A reduction in price will lead to: • an increase in TR when demand is elastic. • a decrease in TR when demand is inelastic. • an unchanged level of total revenue when demand is unit elastic. Price elasticity of demand =

  13. Elasticity and TR (cont.) • In a similar manner, an increase in price will lead to: • a decrease in TR when demand is elastic. • an increase in TR when demand is inelastic. • an unchanged level of total revenue when demand is unit elastic. Price elasticity of demand =

  14. Elasticity and TR (cont.)

  15. Price discrimination • different customers are charged different prices for the same product, due to differences in price elasticity of demand • higher prices for those customers who have the most inelastic demand • lower prices for those customers who have a more elastic demand.

  16. Price discrimination (cont.) • customers who are willing to pay the highest prices are charged a high price, and • customers who are more sensitive to price differentials are charged a low price.

  17. Determinants of price elasticity Price elasticity is relatively high when: • close substitutes are available, • the good or service is a large share of the consumer's budget, and • a longer time period is considered.

  18. Cross-price elasticity of demand • The cross-price elasticity of demand between two goods j and k is defined as:

  19. Cross-price elasticity (cont.) • cross-price elasticity is positive if and only if the goods are substitutes • cross-price elasticity is negative if and only if the goods are complements.

  20. Income elasticity of demand • A good is a normal good if income elasticity > 0. • A good is an inferior good if income elasticity < 0.

  21. Income elasticity of demand • A good is a luxury good if income elasticity > 1. • A good is a necessity good if income elasticity < 1.

  22. Price elasticity of supply

  23. Perfectly inelastic supply

  24. Perfectly elastic supply

  25. Determinants of supply elasticity • short run - period of time in which capital is fixed • all inputs are variable in the long run • supply will be more elastic in the long run than in the short run since firms can expand or contract their capital in the long run.

  26. Tax incidence • distribution of the burden of a tax depends on the elasticities of demand and supply. • When supply is more elastic than demand, consumers bear a larger share of the tax burden. • Producers bear a larger share of the burden of a tax when demand is more elastic than supply.

More Related