Transcript Elasticity of Demand - Information technology

Elasticity of Demand
AG BM 102
Introduction
• Key question about demand is how
responsive is consumption to a price
change?
• The demand curve provides a quantitative
answer
• But that answer is dependent on units of
measurement
• Elasticity does not depend on units of
measure!
Own Price Elasticity of Demand
- the percentage change in
quantity demanded in response
to a one percent change in the
price
An Example - Beef
Price/lb.
Price/lb.
$5.00
Quantity
lb./cap.
50
$3.75
Quantity
lb./cap.
75
$4.75
55
$3.50
80
$4.50
60
$3.25
85
$4.25
65
$3.00
90
$4.00
70
$2.75
95
Beef Demand
5
$/lb.
4
3
2
40
50
60
70
80
lbs ./capita
90
100
Calculating the Equation for the
Demand Curve
• Take any two points, such as $4.00 and
70 lb, and $3.00 and 90 lb.
• The equation for a straight line demand
curve is Q = a + b P
Q  a  bP
b  (Q1  Q2) / ( P1  P2)
a  Q1  bP1
Q !  70lbs., P1  $4.00,
Q2  90lbs. and
P2  $3.00
b  (70  90) / (4  3)   20
a  70  ( 20) 4  150
Q  150  20 P
To check put in Prices
• If P=3, Q = 150 - 20(3) = 90
• If P=4, Q = 150 - 20(4) = 70
Formula for Demand Elasticity
  (Q  Q1) / (Q1) / ( P  P1) / ( P1)
2
2
Elasticity at P=$4.00 and Q=70 lbs.
  (90  70) / (70) / (3  4) / (4)   114
.
Interpreting elasticity
• Inelastic
• elastic
• unitary elastic
0    1
 1    
  1
Inelastic demand means
quantity change is
proportionately less than price
change, or that demand is not
especially price responsive –
like drinking milk
Elastic demand means quantity
change is proportionately more
than price change, or that
demand is particularly price
responsive – like lobster
Another view of the formula
  (Q  Q1) / ( P  P1) *( P1) / (Q1)  b( P / Q )
2
2
1
1
Note
• The units cancel out, so elasticity is not
dependent on units used in the data
• For straight-line demand curves, the value
of elasticity changes as you move along
the curve
• The closer you are to the vertical access
the more elastic demand
• The closer to the horizontal access the
more inelastic
Some demand issues
• Is the demand for all food elastic or
inelastic?
• Is the demand for all meat elastic or
inelastic?
• Is the demand for chicken elastic or
inelastic?
• Is the demand for prime rib elastic or
inelastic?
Concluding comments
• Elasticity allows discussion of demand
without units
• It makes description of demand curves
more descriptive
• Makes analysis of changes easier