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Elasticity of Demand and Supply

Elasticity of Demand and Supply. Mr. Bammel. Helps us understand the degree of Changes in QD or QS due to an initial change of price or income; Mostly price though; Elasticity of Demand- the responsiveness/sensitivity of changes in Price; which will vary depending on the product;

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Elasticity of Demand and Supply

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  1. Elasticity of Demand and Supply Mr. Bammel

  2. Helps us understand the degree of Changes in QD or QS due to an initial change of price or income; Mostly price though; • Elasticity of Demand- the responsiveness/sensitivity of changes in Price; which will vary depending on the product; • High Responsiveness means Elastic • Low Responsiveness means inelastic Elasticity

  3. Must use the Midpoint formula for price elasticity coefficient: The Formula

  4. Ed Greater than 1 – Elastic • Ed  Less than 1 – Inelastic • Ed Equal to 1 – Unit Elastic • If change in price has NO change on QD, then it would be perfectly Inelastic; • If change in price causes QD to go from 0 to all that consumers can buy (= infinite), then it would be perfectly elastic; Interpretations of the Formula

  5. The importance to firms of Elasticity is how changes in price will effect the TR, thus profits: • TR = P x Q • Test: • TR inverse of P change = D is elastic • TR is direct with P change = D is inelastic • TR has no change due to P change = Unit elastic Total-Revenue Test

  6. If Demand is Elastic: a decrease in P will increase TR, vice versa; • If Demand is Inelastic: an increase in P will increase TR, vice versa; • If Demand is Unit Elastic: whether we have an increase or decrease, TR will remain unchanged; TR continued

  7. Substitutability • Proportion of Income • Luxuries vs. Necessities • Time Discuss with a partner how these determinants will affect Demand Elasticity. Provide examples of how these would function. Determinants of Elasticity

  8. If QS is responsive to the change in price  Elastic • If QS is unresponsive to the change in price Inelastic • Formula: Price Elasticity of Supply

  9. Read on pages 383– 384… • What is the factor which defines the elasticity of supply? • Be sure to incorporate the concepts of market period, the short run, and the long run.

  10. Partner back up…one of you read in detail and understand Cross Elasticities and the other do the same for Income Elasticities. • Cover the two subjects as I did with demand and supply elasticities; be sure to emphasize the formula, the purpose, etc. Cross and Income Elasticities

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