Transcript Document

Elasticity = Responsiveness
• Allow us to analyze S & D with greater precision.
• Are measures of how much buyers and sellers
respond to changes in market conditions.
• BY HOW MUCH?
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Price Elasticity of Demand/Supply
• For any market shock…
• Examine if the supply or demand curve shifts.
• Determine the direction of the shift of the curve.
• Use the supply-and-demand diagram to see how
the market equilibrium changes.
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An Example of Price Elasticity of Demand
• Can good news for farming be bad news for
farmers?
• What happens to wheat farmers and the market for
wheat when scientists discover a new more
productive wheat hybrid?
Copyright © 2004 South-Western/Thomson Learning
Figure 8 An Increase in Supply in the Market for Wheat
Price of
Wheat
2. . . . leads
to a large fall
in price . . .
1. When demand is inelastic,
an increase in supply . . .
S1
S2
$3
2
Demand
0
Quantity of
Wheat
3. . . . and a proportionately smaller
increase in quantity sold. As a result,
revenue falls from $300 to $220.
100
110
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Figure 8 An Increase in Supply in the Market for Wheat
$220
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Summary
• Price elasticity of demand measures how much the
Qd responds to changes in the P.
• Change in S, P adjusts, Q responds, Law of D
• Price elasticity of demand is calculated as the %
change in Qd divided by the % change in P.
• Demand is typically more elastic in the long run
than in the short run.
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Summary
• If a demand curve is elastic, total revenue falls
when the price rises.
• If a demand curve is inelastic, total revenue rises
as the price rises.
• Don’t memorize this, test it, use logic
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Elasticity of a Linear Demand Curve
•Draw this D curve
•Calculate Total Revenue
•Calculate Elasticity
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Summary
• The price elasticity of supply measures how much
the Qs responds to changes in the P.
• Change in D, P adjusts, Qs responds, Law of S
• The price elasticity of supply is calculated as the
% change in Qs divided by the % change in P.
• Supply is typically more elastic in the long run
than in the short run.
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Summary
• Income elasticity measures how much the Qd
responds to changes in consumers’ income.
• normal good (+), inferior good (-)
• luxury good (>1), necessity good (<1)
• Cross-price elasticity measures how much the Qd
of one good responds to changes in the price of
another good.
• complement goods (-), substitute goods (+)
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