Transcript Chapter 4 PP - Part 1

SAYRE | MORRIS
Seventh Edition
CHAPTER 4
Elasticity
© 2012 McGraw-Hill Ryerson Limited
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LO1
Price Elasticity of Demand
•
a measure of how much quantity demanded
changes as a result of a change in price
% quantity demanded
p
%price
•
can be expanded to:
 Qd
 100
average Q d
p 
P
 100
average P
© 2012 McGraw-Hill Ryerson Limited
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LO1
Price Elasticity of Demand
Example: airline tickets
Vancouver to Edmonton
Quantity
Price
of Tickets
Total
Revenue
$650
1000
$650 000
550
1100
605 000
Price
$650
550
Vancouver to Calgary
Quantity
of Tickets
Total Revenue
1000
1250
$650 000
687 500
100
%  Qd 
 100  9.5%
1050
%  Pr ice 
p 
$100
 100  16.7%
$600
%Q 9.5%

 0.57
%P 16.7%
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%
QD = (1100 – 1000)
((1100 + 1000)/2)
= 100 x 100% = 9.5%
1050
%
P = (650 – 550)
((650 + 550) / 2)
= 100 x 100% = 16.7%
600
EP = 9.5% / 16.7% = 0.57
© McGraw Hill Publishing Co, 2011
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LO1
Price Elasticity of Demand
Elasticity Coefficient
• a number that measures the responsiveness of
quantity demanded to a change in price
If coefficient is:
Demand is:
Greater than 1
Elastic
Less than 1
Inelastic
Equal to 1
Unitary
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LO1
Price Elasticity of Demand
Inelastic Demand
• quantity demanded that is not very responsive to a
change in price
Elastic Demand
• quantity demanded that is quite responsive to a
change in price
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LO1
Price Elasticity of Demand
Unitary Demand
• the point where the percentage change in quantity
is exactly equal to the percentage change in price
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LO1
Elasticity and Total Revenue
• If demand is elastic, an increase in price will
decrease revenue
• If demand is inelastic, an increase in price will
increase revenue
Vancouver to Edmonton
Price
Quantity Total Revenue: C
Vancouver to Calgary
Price
Quantity Total Revenue: D
$650
1000
$650 000
$650
1000
$650 000
750
900
675 000
750
750
562 500
inelastic
elastic
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Vancouver to Edmonton
Elasticity = 100/950 = 0.105 = 0.735 (Inelastic)
100/700 0.1428
TR1= 650 x 1000 = 650,000
TR2 = 750 x 900 = 675,000
Vancouver to Calgary
Elasticity = 250/875 = 0.2857 = 2 (Elastic)
100/700 0.1428
TR1 = 650 x 1000 = 650,000
TR2 = 750 x 750 = 562,500
© McGraw Hill Publishing Co, 2011
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LO1
Elasticity and Total Revenue
If Demand is:
and Price …
inelastic (<1)
falls
then Total Revenue
…
falls
inelastic (<1)
rises
rises
elastic (>1)
falls
rises
elastic (>1)
rises
falls
unitary elastic (=1)
falls
stays the same
unitary elastic (=1)
rises
stays the same
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LO2
Elasticity and Slope
Slope
• Rise over run
Elasticity
• Percentage change in quantity over percentage
change in price
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Run
Rise
P
Q
• The slope of a straight line remains the same along
each point on the curve.
• Elasticity does not remain constant. Dealing with %
change has everything to do with the values we are
using.
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LO3
Determinants of Elasticity
Examples of elastic and inelastic demands:
Commodities That Have Elastic
Demands
fresh tomatoes (4.60)
Commodities That Have Inelastic
Demands
household electricity (0.13)
movies (3.41)
eggs (0.32)
lamb (2.65)
car repairs (0.36)
restaurant meals (1.63)
food (0.58)
china and tableware (1.54)
household appliances (0.63)
automobiles (1.14)
tobacco (0.86)
Source: H.S. Houthakker and Lester D. Taylor, Consumer Demand in the United States (Cambridge, MA:
Harvard University Press, 1970).
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LO3
Determinants of Price Elasticity
The demand for a product is more elastic:
• the closer and the greater are the number of available
substitutes;
• the larger the percentage of one’s income that is spent on
the product; and
• the longer the time period involved.
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