Transcript Slide 1

the responsiveness of the amount
purchased to a change in price.
% Change in
% Q
Price Elasticity quantity demanded
of demand = % Change in Price = % P
- or put more simply -
=
(Q0 - Q1 )
Q0
( P0 - P1 )
P0
=
(Q0 - Q1 )
Q0
X
P0
( P0 - P1 )
PED > 1 Elastic
< 1 Inelastic
= 1 Unit Elastic
Mid Points Formula
% Change in
% Q
Price Elasticity quantity demanded
of demand = % Change in Price = % P
- But use average Q and average P -
(Q0 - Q1 )
=
(Q0  Q1 ) 2
( P0 - P1 )
( P0  P1 ) 2
(Q0 - Q1 ) (Q0 Q1 )
=
( P0 - P1 ) ( P0 P1 )
Examples
Inelastic
Salt
0.1
Matches
0.1
Toothpicks
0.1
Airline travel (short run)
0.1
Gasoline (short run)
0.2
Gasoline (long run)
Natural gas, home (short run)0.7
Natural gas, home (long run)0.1
0.5
Coffee
0.3
Fish (cod), at home
Tobacco products (short run)0.5
Legal services (short run) 0.5
0.4
Physician services
0.6
Taxi (short run)
0.6
Automobiles (long run)
0.2
Approximately Unitary Elasticity
Movies
0.9
Homes, owner occupied (long run)1.2
Shellfish (consumed at home)
0.9
Oysters (consumed at home)
1.1
Private education
1.1
0.9
Tires (short run)
1.2
Tires (long run)
Radio and television receivers 1.2
Elastic
Restaurant meals
Foreign travel (long run)
Airline travel (long run)
Fresh green peas
Automobiles (short run)
Chevrolet automobiles
Fresh tomatoes
2.3
4.0
2.4
2.8
1.2-1.5
4.0
4.6
Calculate the Price Elasticity of the following:
1. The number of cans demanded of a soft drink
increases by 30 % after its price decreases by 40%
2. The number of available apartments increases by
8% following a 6 % increase in rents
3. The number of Caesar salads demanded at a
restaurant increases from 60 to 80 per week when the
price falls from $5.00 to $4.50
4. At a price of $200, 10,000 treadmills were supplied
each month. Since the price increased to $250, 14,000
are supplied each month.
5. The number of DVDs demanded each weekend from
Blockbuster falls from 500 to 400 following an increase
in the rental charge from $2.00 to $2.40
Quan Price
1 X 8
2
3
4
5
6
7
8
X
X
X
X
X
X
X
7
6
5
4
3
2
1
Total
Revenue
Elasticity
=
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=
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=
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=
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=
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=
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=
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Quan Price Quan Price Ch in Q X P1
1
1
2
2
Q1
Ch in P
___ X ___ = ___
100
5
120
3
20
8
25
7
___
12
3
16
0
___
X
___ = ___
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X
=
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150
12
200
10
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45
6
45
8
___
X
___ = ___
32
24
40
2
___
X
___ = ___
___
___
Different Elasticities
• Perfectly inelastic:
An increase in Price results
in no change in Quantity
Mythical
demand
curve
(a)
Quantity/
time
• Relatively inelastic:
A percent increase in Price
results in a smaller % reduction
in Quantity
Demand for
Cigarettes
(b)
Quantity/
time
• Unitary elasticity:
The percent change in quantity
demanded due to an increase in
price is equal to the % change in
price.
Demand curve of
unitary elasticity
(c)
Quantity/
time
=1
Elasticity of Demand
Demand for
Granny Smith
Apples
(d)
• Relatively elastic:
A % increase in Price
leads to a larger %
reduction in Quantity.
Quantity/
time
• Perfectly elastic:
Consumers will buy all of
Farmer Hollings’s wheat at the
market price, but none will be
sold above the market price.
Demand for Farmer
Hollings’s wheat
(e)
Quantity/
time
What affects Elasticity???
1. Available Substitutes
2. Necessity vs Luxury
3. Proportion of Income
4. Time to shop around
What affects Supply Elasticity???
1. Time
a. Market Period
b. Short Run
c. Long Run
Elastic and Inelastic
Supply Curves
Price
Price
Quantity
Quantity
• Elastic supply
– quantity supplied is sensitive to
changes in price.
Inelastic demand
– quantity supplied is not sensitive to
changes in price.
Income Elasticity
• the responsiveness of a product’s
demand to a change in income.
% Change in
Income Elasticity quantity demanded
of demand = % Change in Income
• A normal good has a positive
income elasticity of demand.
– As income increases, the demand
for normal goods increases.
• Goods with a negative income
elasticity are inferior goods.
– As income expands, the demand
for inferior goods will decline.
Income Elasticity of Demand
Low Income Elasticity
Margarine
Fuel
Electricity
Fish (haddock)
Food
Tobacco
Hospital care
- 0.20
0.38
0.20
0.46
0.51
0.64
0.69
High Income Elasticity
Private education
New Cars
Recreation and amusements
Alcohol
2.46
2.45
1.57
1.54
Cross Price Elasticity
• the responsiveness of a product’s demand
to a change in the price of another good.
Cross Price
Elasticity
=
% Change in
Qx
% Change in Py
• A complement has a negative cross
price elasticity.
– As Py increases, the demand for Y decreases,
and demand for goods that are consumed
with Y also decreases.
• A substitute has a positive cross price
elasticity
– As Py increases, the demand for Y decreases,
and demand for goods that can be consumed
instead of Y also decreases.
If Mr. Smith thinks the last dollar spent on shirts
satisfaction than the last dollar spent on cola, and
maximizing consumer, he should
a.decrease his spending on cola.
b.decrease his spending on cola and increase his
c. increase his spending on shirts.
d.increase his spending on cola and decrease his
yields less
Smith is a utilityspending on shirts.
spending on shirts.
Which of the following would be the best example of consumer surplus?
a.Jane does not get cell-phone service because she feels that it is
worth less than the $30 a month fee.
b.Sam pays $8 for a haircut that is worth $10 to him.
c. Ralph buys a house for $104,000, the maximum amount that he
would be willing to pay for it.
d.Sue purchases a book for $20 and uses a credit card to pay for
it.
“I like ice cream, but after eating homemade ice cream last night, I want to
have something else for dessert today.” This statement most clearly reflects
a. the budget constraint.
b. consumer irrationality.
c. the second law of demand: Price elasticity increases with time.
d. the law of diminishing marginal utility.
If Sarah’s income rises by 20 percent, and, as a result, she purchases 40
percent more designer clothing, her income elasticity for designer clothing is
a. 0.5.
b. 1.0.
c. 2.0.
d. seriously distorted.
Suppose the state of New York imposes a one dollar per pack tax on
cigarettes, which increases their price by 30 percent, and as a result, the
quantity sold declines by 20 percent. The price elasticity of demand for
cigarettes is equal to
a. –0.20.
b. –0.67.
c. –1.50.
d. –3.00.
Studies indicate that the demand for fresh tomatoes is much more elastic than
the demand for salt. These findings reflect that
a. tomatoes are a necessity while salt is a luxury.
b. it takes longer for consumers to adjust to a change in the price of salt
than to a change in the price of tomatoes.
c. salt will not spoil as easily as fresh tomatoes.
d. more good substitutes exist for fresh tomatoes than for salt.
If a Krispy Kreme doughnut shop near campus increases its prices by 5 %, but
revenues from its sales are unchanged, the price elasticity of demand for the
services offered by the doughnut shop must be
a. elastic.
b. of unitary elasticity.
c. inelastic.
d. equal to 0.5.
If the price of gasoline goes up, and Dan now buys fewer candy bars because
he has to spend more on gas, this would best be explained by
a. the substitution effect.
b. the income effect.
c. the highly elastic demand for gasoline.
d. weight watchers effect.
Which of the following is true for this demand
curve?
a. An increase in price from $2 to $3 will
reduce total expenditures on the product.
b. In the $2 to $3 range, the price
elasticity of the demand curve is
approximately unitary.
c. At a price of $2, the price elasticity of
the demand curve equals approximately –2.5.
d. In the $2 to $3 range, the demand curve
is inelastic.