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Elasticity

Elasticity. And it’s applications. Demand. Elasticity is used to measure the level of response for quantity demand or supplied to the price Price elasticity of Demand measures how much demand responds to price changes There are 4 determinates of price elasticity of demand.

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Elasticity

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  1. Elasticity And it’s applications

  2. Demand • Elasticity is used to measure the level of response for quantity demand or supplied to the price • Price elasticity of Demand measures how much demand responds to price changes • There are 4 determinates of price elasticity of demand

  3. Determinates of Price Elasticity of Demand • Availability of close substitutes: the more substitutes available the more elastic (more responsive) it’s demand • Necessities vs. Luxuries: necessities are more inelastic (less responsive) • Definition of market: narrowly defined markets are more elastic than broadly defined ones • Time horizon: goods are more elastic over time

  4. Calculating the elasticity • Simple formula • Price Elasticity of Demand = • Using the Midpoint to calculate %age s • Point A: Price = $4 quantity = 120 • Point B: Price = $6 quantity = 80 • (6-4)/5* 100 = 40% • (120-80)/100*100 =40% • 40/40 =1 • Elasticity = 1 % age in quantity demanded %age in price

  5. Elasticity classification • Price elasticity of demand is greater than 1 then demand is elastic • Price elasticity of Demand is less than 1 demand is inelastic • Price elasticity of Demand = 1 demand is unit elastic • The flatter the demand curve the more elastic the demand

  6. Demand $5 4 1. An increase in price . . . 100 2. . . . leaves the quantity demanded unchanged. Figure 1 The Price Elasticity of Demand (a) Perfectly Inelastic Demand: Elasticity Equals 0 Price Quantity 0

  7. 1. At any price above $4, quantity demanded is zero. $4 Demand 2. At exactly $4, consumers will buy any quantity. 3. At a price below $4, quantity demanded is infinite. Figure 1 The Price Elasticity of Demand (e) Perfectly Elastic Demand: Elasticity Equals Infinity Price Quantity 0

  8. $5 4 1. A 22% Demand increase in price . . . 90 100 2. . . . leads to an 11% decrease in quantity demanded. Figure 1 The Price Elasticity of Demand (b) Inelastic Demand: Elasticity Is Less Than 1 Price Quantity 0

  9. $5 4 Demand 1. A 22% increase in price . . . 80 100 2. . . . leads to a 22% decrease in quantity demanded. Figure 1 The Price Elasticity of Demand (c) Unit Elastic Demand: Elasticity Equals 1 Price Quantity 0

  10. Elasticity and revenue • When demand is inelastic price and total revenue move in the same direction • When demand is elastic price and total revenue move in opposite directions • When demand is unit elastic revenue remains constant with price changes

  11. Other Demand Elasticities • Income Elasticity • Types of Goods • Normal Goods • Inferior Goods • Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.

  12. Other Demand Elasticities • Income Elasticity • Goods consumers regard as necessities tend to be income inelastic • Examples include food, fuel, clothing, utilities, and medical services. • Goods consumers regard as luxuries tend to be income elastic. • Examples include sports cars, furs, and expensive foods.

  13. Place these items in order from most elastic to least elastic • Beef • Salt • European Vacation • Steak • Honda Accord • Dijon Mustard

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