Chap004 Miller Meiners

7/25/2019 Chap004 Miller Meiners

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Chapter 4

Elasticities

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc !ll


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Learning Objectives

What is price elasticity of demand?

What are categories of demand elasticity andwhat factors inflence them?

What is the relationship between demandelasticity and total revene?

What is income elasticity of demand?

What is cross elasticity of demand?

What is price elasticity of spply?

What are categories of spply elasticity andwhat factors inflence them?

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#rice Elasticity of $emand

#rice elasticity of demand measresconsmers% responsiveness to pricechanges&

How much'antity demanded will changeif price changes&

(gnore the negative sign since it%s alwaysthere&

priceinchangePercentage

demandedquantityinchangePercentage

demandofelasticityPrice

=

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Categories of $emand Elasticity

(f price elasticity of demand )*+

, change in 'antity demanded ) , change in price

Elastic demand

(f price elasticity of demand -*+

, change in 'antity demanded - , change in price

(nelastic demand

(f price elasticity of demand .*+

, change in 'antity demanded . , change in price

/nit elastic demand

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Elastic $emand Crve

1 smallpercentagechange in price+

1 largepercentage

change in 'antity& he price elasticity of

demand between#oint 1 and #oint 3 is

high& #rice elasticity of

demand ) *&

#oint 1#oint 3

56

220100

#rice

7antity

$emand

4!0


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(nelastic $emand Crve

#oint 1

#oint 3

7antity*99 **9

*9

4

#rice 1 largepercentagechange in price+

1 smallpercentage

change in 'antity& he price elasticity ofdemand between#oint 1 and #oint 3 is

low& #rice elasticity ofdemand - *&

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#erfectly (nelastic $emand Crve

7antity

#rice 7antity demanded isconstant and does notrespond to price

changes& #rice elasticity ofdemand . 9&

his demand crve

violates the Law of$emand&

/nrealistic demandcrve&

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#erfectly Elastic $emand Crve

7antity

#rice 7antity demanded ise:tremely responsiveto price changes&

he smallest pricechange cases infinitechange in 'antitydemanded&

#rice elasticity ofdemand . infinity&

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* 29

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/nit Elastic $emand Crve

1ny percentagechange in pricecases the same

percentage change in'antity demanded&

#rice elasticity ofdemand . *&

Elasticity is the samebt not the slopealong the demandcrve&

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*9

Elasticity 1long a


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**

$o >o now?

(f a *9, price increase cases 89, fall in'antity demanded then what is the priceelasticity of demand?

(s it elastic@ inelastic or nit elastic demand?

(t is elastic demand&

610%

60%

demandofelasticityPrice

=

=

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#rice Elasticity of $emand and otal

Aevene otal revene . #rice B sales&

Law of demand+ 1s price increases@

'antity demanded falls and as pricedecreases@ 'antity demanded rises&


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Elastic $emand and otal Aevene

Elastic demand

. 7antity demanded isvery responsive to pricechange&

Lower price

. ain of hge nmber ofcstomers&

. (ncrease in total revene #rice and total revene

move in the oppositedirection&

5

&

Total revenue= ($8)(100)=$800 and isrepresentedby this box.

We are here onthe demand

crve&

#rice

7antity*99 *@999

Total revenue=($7.0)(1!000)=$7!00 and is represented bythis box.

6&09


crve&

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(nelastic $emand and otal Aevene

Total revenue=($10)(00)= $!000 and isrepresentedby this box.

We are here on thedemand crve&

7antity099

*9

#rice


crve&

Total revenue =($2)("00)= $1!200 and is representedby this box.

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(nelastic demand

. 7antity demanded is notresponsive to pricechange

Lower price

. ain of very few nmberof cstomers

. $ecrease in total revene #rice and total revene

move in the samedirection

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*0

#rice Elasticity of $emand and otalAevene

#rie %lastiity o&'emand

%&&et o& a

#rie nrease

%&&et o& a

#rie 'erease

Elastic $ecrease in totalrevene

(ncrease in totalrevene

/nit elastic Do change in totalrevene

Do change in totalrevene

(nelastic (ncrease in totalrevene

$ecrease in totalrevene

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actors hat (nflence

$emand Elasticity


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actors hat (nflence

$emand Elasticity

#rodct definition+

he more broadly defined a prodct@ theless elastic the prodct%s demand&

3roadly defined prodcts have less

sbstittes whereas narrowly definedprodcts have more sbstittes&

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actors hat (nflence

$emand ElasticityDecessities+

. oods that are considered a Fmst have&G

Decessities do not have good sbstittes&

Decessities have less elastic demand&

L:ries+

L:ry goods have more elastic demand&

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actors hat (nflence

$emand Elasticityime+ Consmers are more fle:ible in the long rn than

in the short term&

he price elasticity of demand is higher the moretime consmers have to adjst to price changes&


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actors hat (nflence

$emand Elasticity

1ddiction+

ear of being addicted to a good canreslt in high price elasticity of demand&

However@ for a consmer already addictedto the good@ price elasticity of demand will

be low&

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$o >o now?

How does the price elasticity of demand vary along astraight line demand crve?#rice elasticity decreases moving along a straight linedemand crve from the top to the bottom&

How does a decrease in price affect total revene whendemand is inelastic?otal revene will decrease&

How do sbstittes affect price elasticity of demand?1 greater availability of sbstittes maIes demand moreelastic&

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(ncome Elasticity of $emand

(ncome elasticity of demand measres how'antity demanded responds to changes inincome&

incomeinchangePercentage

demandedquantityinchangePercentage

incomeofelasticityPrice

=

(ncome elasticity is positive for normal goods& (ncome elasticity is negative for inferior goods&

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Cross Elasticity of $emand

Cross elasticity of demand measres how thechange in price of one good impacts thedemand for another good&

BgoodofpriceinchangePercentage

AgoodofdemandedquantityinchangePercentage

demandofelasticityCross

=

Cross elasticity of demand for sbstittes ispositive&

Cross elasticity of demand for complements isnegative&

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#rice Elasticity of


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Categories of


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3ehind #rice Elasticity of


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$o >o now?

When is income elasticity of demand negative?(ncome elasticity of demand is negative for inferior goodsi&e& oods which consmers by less with higher income&

What does the cross elasticity of demand measre?Cross elasticity of demand measres how the change inprice of one good impacts the demand for another good&

What is the sign of price elasticity of spply and why does

it have this sign?


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Coming p

1naly=ing policies with marIet

forces of spply and demand&

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1ppendi:+ calclating demand elasticity

#rice elasticity of demand

2/)

)2/)

)

01

01

01

01

PP

PPQQ

QQ

+

+

priceinchangePercentage

demandedquantityinchangePercentage=

=

Where 7*. new 'antity@ 79. old 'antity

#*. new price@ #9. old price

4!""

Chap004 Miller Meiners

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