Transcript Lecture #3 >> Chapter 6

ECO 1
ELASTICITY: THE RESPONSIVESS OF DEMAND
AND SUPPLY
Erkmen Giray ASLIM (erkmengirayaslim.com)
e-mail: [email protected]
09/11/2015
Department of Economics
Lehigh University
DEFINING ELASTICITY
• What is elasticity? & Why do we care?
• It is a measure. There is a numerical representation.
• ex. Price elasticity of demand = -2.5
• How much one economic variable responds to changes in another
economic variable?
• Think about bookstores or coffee shops – Price change & QD?
• Responsiveness of the quantity demanded with respect to a change in
price.
• Price elasticity of demand - Is it important to know this?
DEFINING ELASTICITY
• Why don’t we use the slope to measure price elasticity?
• We can but there are drawbacks.
• Slope is sensitive to units.
• Ex. $1 per gallon decrease in gasoline leads to 0.1 million change in the QD
of gasoline: 0.1/- 1 = -0.1, in cents : 0.1/-100= -0.001.
• We use percentage changes for the price elasticity of demand.
• i.e. 10 percent more gasoline – it is not dependent on units.
• LESSON: Elasticity is not the same as the slope!
PRICE ELASTICITY FORMULA
• The price elasticity of demand is always negative!
• But we usually compare relative sizes between goods. So, we can take the
absolute value. (-2 vs. -1)
• We have 3 cases: Elastic demand (> 1), Inelastic demand(< 1), and
Unit-elastic demand(= 1).
• i.e. 20% / -10% (bagel) or 5% / -10% (wheat)
• What is the price elasticity of supply, cross-price elasticity of
demand, and income elasticity of demand?
REAL-WORLD ELASTICITIES
EXAMPLE OF COMPUTING ELASTICITIES
A to B (P decrease): 20/-7.5 = -2.7 & B to A (P increase): -16.7/8.1=-2.1
THE MIDPOINT FORMULA
• Ensures that we have only one value by averaging!
Price elasticity of demand =
SOLVING THE PROBLEM
SUMMARIZE
If demand is…
then the absolute value
of price elasticity is…
SUMMARIZE
If demand is…
then the absolute value
of price elasticity is…
SUMMARIZE
If demand is…
then the absolute value
of price elasticity is…