Transcript Elasticity
Elasticity Let’s talk about insulin and bicycles There are 23.6 million people in the United States, or 8% of the population, who have diabetes. The total prevalence of diabetes increased 13.5% from 2005-2007. Only 24% of diabetes is undiagnosed, down from 30% in 2005 and from 50% ten years ago. http://www.diabetes.org/diabetes-statistics.jsp A bicycle P P $300 $3 $2 $200 $1 $100 D 10 m Insulin Q D 100 200 500 Q Bicycles P INELASTIC P ELASTIC $300 $3 $2 $200 $1 $100 D 10 m Insulin Q D 100 200 500 Q Bicycles The ELASTICITY is a measure of the responsiveness of quantity demanded to its price. Total Revenue The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold: TR=P x Q P P $300 $3 $2 $200 $1 $100 P $3 $2 $1 D 10 m Insulin x Q = x 10m x 10m x 10m Q TR $30m $20m $10m D 100 200 500 Q Bicycles P x Q = TR $300 x 100 $30,000 $200 x 200 $40,000 $100 x 500 $50,000 Total Revenue Test INELASTIC P goes up, TR goes up P goes down, TR goes down ELASTIC P goes up, TR goes down P goes down, TR goes up Elasticity Coefficient Inelastic (insulin) Ed < 1 Elastic (bicycles) Ed > 1 Formula for the Elasticity of Demand Ed = the percentage change in quantity demanded divided by the percentage change in price. Ed = % % in Qd in P % NUMERATOR in Qd = in Qd Qd DENOMINATOR % in P = in P P Examples The price of ice cream rises by 10% and quantity demanded falls by 20%. Elasticity of demand=(20%)/(10%)=2 Don’t report negative numbers, everything in ABSOLUTE values. Ed = in Qd Qd in P P SIMPLIFY ONE LAST TIME: Ed = in Qd Qd P in P Plot the following Price Quantity $10 8 2 3 4 5 6 4 ELASTICITY QUESTIONS 1. Raymond is a butcher who recently raised the price of steak at his market from $1.50 to $2.00 a pound. Correspondingly, his sales dropped from 200 pounds per day to 100 pounds per day. Figure out the elasticity of demand for steak at Lopez’ market. Is it elastic or inelastic? in Qd Qd P in P 2. At 25 cents apiece, Mr. Blackman sells 100 chocolate bars per week. If he drops his price to 20 cents, his weekly sales will increase to 110 bars. Is the demand for chocolate bars elastic or inelastic? Prove your answer. in Qd Qd P in P As price goes down, TR goes _____ 3. Suppose that 30 tons of coal are purchased at a price of $20 per ton and 50 tons are purchased at $15 per ton. What is the elasticity coefficient in this example? If we converted tons to pounds, would the measurement of the elasticity coefficient change? in Qd Qd P in P 1 ton = 2000 pounds