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Describing Supply and Demand: Elasticities

Laugher Curve. Q. What's the difference between an economist and a befuddled old man with Alzheimer's? A. The economist is the one with a calculator.. The Concept of Elasticity . Elasticity is a measure of the responsiveness of one variable to another.The greater the elasticity, the greater the responsiveness..

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Describing Supply and Demand: Elasticities

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    1. Describing Supply and Demand: Elasticities Chapter 6

    2. Laugher Curve Q. Whats the difference between an economist and a befuddled old man with Alzheimers? A. The economist is the one with a calculator.

    3. The Concept of Elasticity Elasticity is a measure of the responsiveness of one variable to another. The greater the elasticity, the greater the responsiveness.

    4. Price Elasticity The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

    5. Price Elasticity The price elasticity of supply is the proportional change in quantity demanded relative to the proportional change in price.

    6. What Information Price Elasticity Provides Price elasticity of demand and supply gives the exact quantity response to a change in price.

    7. Classifying Demand and Supply as Elastic or Inelastic Demand or supply is elastic if the percentage change in quantity is greater than the percentage change in price. E > 1

    8. Classifying Demand and Supply as Elastic or Inelastic Demand or supply is inelastic if the percentage change in quantity is less than the percentage change in price.

    9. Elastic Demand and Supply Elastic supply means that quantity changes by a greater percentage than the percentage change in price. The same holds true for demand.

    10. Inelastic Demand and Supply Inelastic supply means that quantity doesn't change much with a change in price. The same holds true for demand.

    11. Elasticity Is Independent of Units Percentages allow us to have a measure of responsiveness that is independent of units. This makes comparisons of responsiveness of different goods easier.

    12. Calculating Elasticities To determine elasticity divide the percentage change in quantity by the percentage change in price.

    13. The End-Point Problem The end-point problem the percentage change differs depending on whether you view the change as a rise or a decline in price.

    14. The End-Point Problem Economists use the average of the end points to calculate the percentage change.

    15. Graphs of Elasticities

    16. Graphs of Elasticities

    17. Graphs of Elasticities

    18. Calculating Elasticity at a Point Let us now turn to a method of calculating the elasticity at a specific point, rather than over a range or an arc.

    19. Calculating Elasticity at a Point To calculate elasticity at a point, determine a range around that point and calculate the arc elasticity.

    20. Calculating Elasticity at a Point

    21. Calculating Elasticity at a Point

    22. Elasticity and Supply and Demand Curves Two important points to consider: Elasticity is related (but is not the same as) slope. Elasticity changes along straight-line demand and supply curves.

    23. Elasticity Is Not the Same as Slope The steeper the curve at a given point, the less elastic is supply or demand. There are two limiting examples of this.

    24. Elasticity Is Not the Same as Slope When the curves are flat, we call the curves perfectly elastic.

    25. Elasticity Is Not the Same as Slope When the curves are vertical, we call the curves perfectly inelastic.

    26. Perfectly Inelastic Demand Curve

    27. Perfectly Elastic Demand Curve

    28. Elasticity Changes Along Straight-Line Curves Elasticity is not the same as slope. Elasticity changes along straight line supply and demand curvesslope does not.

    29. Elasticity Changes Along Straight-Line Curves On a demand curve, elasticity is perfectly elastic (E = ) at the price intercept.

    30. Elasticity Changes Along Straight-Line Curves Elasticity is perfectly elastic (ES = ) where a straight line supply curve intercepts the price axis.

    31. Elasticity Changes Along Straight-Line Curves Elasticity is perfectly inelastic (ES = 0) where a straight line supply curve intercepts the quantity axis.

    32. Elasticity Along a Demand Curve

    33. Elasticity Along a Supply Curve

    34. Elasticity Review Perfectly elastic quantity responds enormously to price changes (E = ?). Elastic the percentage change in quantity exceeds the percentage change in price (E >1).

    35. Elasticity Review Unit elastic the percentage change in quantity is the same as the percentage change in price (E = 1).

    36. Elasticity Review Inelastic the percentage change in quantity is less than the percentage change in price (E <1).

    37. Substitution and Elasticity As a general rule, the more substitutes a good has, the more elastic is its supply and demand.

    38. Substitution and Demand The larger the time interval considered, or the longer the run, the more elastic is the goods demand curve. There are more substitutes in the long run than in the short run. The long run provides more options for change.

    39. Substitution and Demand The less a good is a necessity, the more elastic its demand curve.

    40. Substitution and Demand Demand becomes more elastic as the definition of a good becomes more specific.

    41. Substitution and Demand Demand for goods that represent a large proportion of one's budget are more elastic than demand for goods that represent a small proportion of one's budget.

    42. Substitution and Demand Goods that cost very little relative to your total expenditures are not worth spending a lot of time figuring out if there is a good substitute.

    43. Substitution and Supply The longer the time period considered, the more elastic the supply. The reasoning is the same as for demand. In the long run there are more options for change so it is easier (less costly) for suppliers to change into the production of another good.

    44. Substitution and Supply Economists distinguish three time periods relevant to supply:

    45. Substitution and Supply In the instantaneous period, quantity supplied is fixed the elasticity of supply is perfectly inelastic.

    46. Substitution and Supply In the short run, some substitution is possible the short-run supply curve is somewhat elastic.

    47. How Substitution Factors Affect Specific Decisions Suppose youve been asked to evaluate the potential impact of a 10 gas tax increase in Washington, D.C. and in the entire nation.

    48. Evaluating the 10 Gas Tax Increase Wed expect the short run the demand curve for gasoline to be less elastic than in the long run. In the long run, motorists would switch to fuel efficient cars.

    49. Evaluating the 10 Gas Tax Increase Demand is probably inelastic for the entire U.S.

    50. Evaluating the 10 Gas Tax Increase Demand for gasoline is very elastic in Washington, D.C.

    51. Empirical Estimates of Elasticities The following table provides short- and long-term estimates of elasticities for a number of goods.

    52. Short-Run and Long-Run Elasticities of Demand

    53. Elasticity, Total Revenue, and Demand The elasticity of demand tells suppliers how their total revenue will change if their price changes. Total revenue equals total quantity sold multiplied by price of good.

    54. Elasticity, Total Revenue, and Demand If ED is elastic (ED > 1), a rise in price lowers total revenue.

    55. Elasticity, Total Revenue, and Demand If ED is unit elastic (ED = 1), a rise in price leaves total revenue unchanged.

    56. Elasticity, Total Revenue, and Demand If ED is inelastic (ED < 1), a rise in price increases total revenue.

    57. Elasticity and Total Revenue

    58. Elasticity and Total Revenue

    59. Elasticity and Total Revenue

    60. Total Revenue Along a Demand Curve With elastic demand a rise in price lowers total revenue. With inelastic demand a rise in price increases total revenue.

    61. How Total Revenue Changes Along a Demand Curve

    62. Elasticity of Individual and Market Demand Market demand elasticity is influenced both by: The number of people who totally drop out when price increases. How much an existing consumer marginally changes his or her quantity demanded.

    63. Elasticity of Individual and Market Demand Price discrimination occurs when a firm separates the people with less elastic demand from those with more elastic demand.

    64. Elasticity of Individual and Market Demand Firms that price discriminate charge more to the individuals with inelastic demand and less to individuals with elastic demands.

    65. Elasticity of Individual and Market Demand Examples of price discrimination include:

    66. Other Elasticity Concepts Other elasticities can be useful in specifying the effects of a shift factor of demand: Income elasticity of demand. Cross-price elasticity of demand.

    67. Income Elasticity of Demand Income elasticity of demand the percentage change in demand divided by the percentage change in income.

    68. Income Elasticity of Demand Income elasticity of demand tells us the responsiveness of demand to changes in income.

    69. Income Elasticity of Demand An increase in income generally increases ones consumption of almost all goods.

    70. Income Elasticity of Demand Normal goods are those whose consumption increases with an increase in income.

    71. Income Elasticity of Demand Normal goods are divided into luxuries and necessities.

    72. Income Elasticity of Demand Luxuries are goods that have an income elasticity greater than one.

    73. Income Elasticity of Demand A necessity has an income elasticity less than 1.

    74. Income Elasticity of Demand Inferior goods are those whose consumption decreases when income increases.

    75. Income Elasticities of Selected Goods

    76. Cross-Price Elasticity of Demand Cross-price elasticity of demand the percentage change in demand divided by the percentage change in the price of another good.

    77. Cross-Price Elasticity of Demand Cross-price elasticity of demand tells us the responsiveness of demand to changes in prices of other goods.

    78. Complements and Substitutes Substitutes are goods that can be used in place of another. Substitutes have positive cross-price elasticities.

    79. Complements and Substitutes Complements are goods that are used in conjunction with other goods.

    80. Cross-Price Elasticities

    81. Some Examples

    82. Some Examples

    83. When Should a Supplier Raise Price? The supplier should raise his price when it faces an inelastic demand. Total revenue increases with a price increase because quantity drops proportionally less than price goes up. Since costs also fall, profit rise.

    84. When Should a Supplier Raise Price? When you have an elastic demand, you should hesitate to increase price.

    85. Elasticity and Shifting Supply and Demand Elasticity can tell us more precisely the effect of shifting supply and demand. The more elastic the demand, the greater the effect of a supply shift on quantity, and the smaller effect on price.

    86. Elasticity and Shifting Supply and Demand Demand highly elastic, supply shifts out.

    87. Elasticity and Shifting Supply and Demand Demand highly inelastic, supply shifts out.

    88. Effects of Shifts in Supply on Price and Quantity

    89. Effects of Shifts in Supply on Price and Quantity

    90. Describing Supply and Demand: Elasticities End of Chapter 6

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