Elasticity and its Applications : dntjnv@yahoo.co.in Elasticity and its Applications BY:- D.N.TIWARI
PGT(ECO)
JNV BAHRAICH UP
In this chapter you will… : dntjnv@yahoo.co.in Learn the meaning of the elasticity of demand.
Examine what determines the elasticity of demand.
Learn the meaning of the elasticity of supply.
Examine what determines the elasticity of supply.
Apply the concept of elasticity in three different markets. In this chapter you will…
THE ELASTICITY OF DEMAND : dntjnv@yahoo.co.in … allows us to analyze supply and demand with greater precision.
… is a measure of how much buyers and sellers respond to changes in market conditions THE ELASTICITY OF DEMAND
Price Elasticity of Demand : dntjnv@yahoo.co.in Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. Price Elasticity of Demand
The Price Elasticity of Demand and Its Determinants : dntjnv@yahoo.co.in Availability of Close Substitutes
Necessities versus Luxuries
Definition of the Market
Time Horizon The Price Elasticity of Demand and Its Determinants
The Price Elasticity of Demand and Its Determinants : dntjnv@yahoo.co.in Demand tends to be more elastic:
the larger the number of close substitutes.
if the good is a luxury.
the more narrowly defined the market.
the longer the time period. The Price Elasticity of Demand and Its Determinants
Computing the Price Elasticity of Demand : dntjnv@yahoo.co.in The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Computing the Price Elasticity of Demand
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities : dntjnv@yahoo.co.in The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.
point Method: A Better Way to Calculate Percentage Changes and Elasticities The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities (Q2 - Q1) / [(Q2 + Q1) / 2] (P2 - P1) / [(P2 + P1) / 2] Price elasticity of demand =
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities : dntjnv@yahoo.co.in From Point A to Point B: Price rise = 50% and Quantity fall = 33%
From Point B to Point A: Price fall = 33% and Quantity rise = 50% The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities (80 - 120) / [(80 + 120)/ 2] (6 - 4) / [(6 + 4)/ 2] Price elasticity of demand = Point A: Price = $4 Quantity = 120
Point B: Price = $6 Quantity = 80 = 1
A Variety of Demand Curves : dntjnv@yahoo.co.in Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one.
Elastic Demand
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one. A Variety of Demand Curves
A Variety of Demand Curves : dntjnv@yahoo.co.in Perfectly Inelastic
Quantity demanded does not respond to price changes.
Perfectly Elastic
Quantity demanded changes infinitely with any change in price.
Unit Elastic
Quantity demanded changes by the same percentage as the price. A Variety of Demand Curves
A Variety of Demand Curves : dntjnv@yahoo.co.in Because the price elasticity of demand measures how much quantity demanded responds to the price, it is closely related to the slope of the demand curve. A Variety of Demand Curves
Figure 5-1 a): Perfectly Inelastic Demand : dntjnv@yahoo.co.in E = 0 0 Quantity Price 1. An increase in price… Figure 5-1 a): Perfectly Inelastic Demand
Figure 5-1 b): Inelastic Demand : dntjnv@yahoo.co.in E < 1 0 Quantity Price 100 1. A 22% increase in price… Figure 5-1 b): Inelastic Demand
Figure 5-1 c): Unit Elastic Demand : dntjnv@yahoo.co.in E = 1 0 Quantity Price 100 1. A 22% increase in price… Figure 5-1 c): Unit Elastic Demand
Figure 5-1 d): Elastic Demand : dntjnv@yahoo.co.in E > 1 0 Quantity Price 100 1. A 22% increase in price… Figure 5-1 d): Elastic Demand
Figure 5-1 e): Perfectly Elastic Demand : dntjnv@yahoo.co.in E = 0 Quantity Price $4.00 Figure 5-1 e): Perfectly Elastic Demand
Total Revenue and the Price Elasticity of Demand : dntjnv@yahoo.co.in Total revenue is 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 Total Revenue and the Price Elasticity of Demand
Figure 5-2: Total Revenue : dntjnv@yahoo.co.in Price Quantity 0 100 P x Q = $400
(revenue) $4.00 Figure 5-2: Total Revenue
Figure 5-3: How Total Revenue Changes When Prices Changes: Inelastic Demand : dntjnv@yahoo.co.in Price Quantity 0 80 $3.00 P x Q = $100
(revenue) $1.00 100 Figure 5-3: How Total Revenue Changes When Prices Changes: Inelastic Demand
Figure 5-4: How Total Revenue Changes When Prices Changes: Elastic Demand : dntjnv@yahoo.co.in Price Quantity Change in Total Revenue when Price Changes 0 50 $4.00 $5.00 20 Figure 5-4: How Total Revenue Changes When Prices Changes: Elastic Demand
Elasticity and Total Revenue along a Linear Demand Curve : dntjnv@yahoo.co.in With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases. Elasticity and Total Revenue along a Linear Demand Curve
Table 5-1. Elasticity and Total Revenue along a Linear Demand Curve : dntjnv@yahoo.co.in Table 5-1. Elasticity and Total Revenue along a Linear Demand Curve
Figure 5-5: A Linear Demand Curve : dntjnv@yahoo.co.in Price Quantity 2 4 6 8 10 12 0 6 5 4 3 2 1 7 14 Figure 5-5: A Linear Demand Curve
Other Demand Elasticities : dntjnv@yahoo.co.in Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
It is computed as the percentage change in the quantity demanded divided by the percentage change in income. Other Demand Elasticities
Other Demand Elasticities : dntjnv@yahoo.co.in Types of Goods
Normal Goods
Inferior Goods
Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. Other Demand Elasticities
Other Demand Elasticities : dntjnv@yahoo.co.in Goods consumers regard as necessities tend to be income inelastic
Examples include food, fuel, clothing, utilities, and medical services.
Goods consumers regard as luxuries tend to be income elastic.
Examples include sports cars, furs, and expensive foods. Other Demand Elasticities
Other Demand Elasticities : dntjnv@yahoo.co.in Cross-Price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of another good.
It is computed as the percentage change in the quantity demanded divided by the percentage change in the price of the second good. Other Demand Elasticities
PRICE ELASTICITY OF SUPPLY : dntjnv@yahoo.co.in Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
Price elasticity of supply is the percentage change in quantity supplied given a percent change in the price. PRICE ELASTICITY OF SUPPLY
The Price Elasticity of Supply and Its Determinants : dntjnv@yahoo.co.in Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
Time period.
Supply is more elastic in the long run. The Price Elasticity of Supply and Its Determinants
Computing the Price Elasticity of Supply : dntjnv@yahoo.co.in The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price. Computing the Price Elasticity of Supply
Computing the Price Elasticity of Supply : dntjnv@yahoo.co.in … using the midpoint method, we calculate the percent change in the price as (2.10 - 1.90) / 2.00 x 100 = 10%
Similarly, we calculate the percent change in the quantity supplied as (11 000 - 9000) / 10 000 x 100 = 20% 20% Price elasticity of supply = Suppose an increase in the price of milk from $1.90 to $2.10 a litre raises the amount that dairy farmers produce from 9000 to 11 000 L per month… = 2.0 Computing the Price Elasticity of Supply 10%
Figure 5-6 a): Perfectly Inelastic Supply : dntjnv@yahoo.co.in E = 0 0 Quantity Price 1. An increase in price… Figure 5-6 a): Perfectly Inelastic Supply
Figure 5-6 b): Inelastic Supply : dntjnv@yahoo.co.in E < 0 0 Quantity Price 100 1. A 22% increase in price… Figure 5-6 b): Inelastic Supply
Figure 5-6 c): Unit Elastic Supply : dntjnv@yahoo.co.in E = 1 0 Quantity Price 100 1. A 22% increase in price… Figure 5-6 c): Unit Elastic Supply
Figure 5-6 d): Elastic Supply : dntjnv@yahoo.co.in E > 1 0 Quantity Price 100 1. A 22% increase in price… Figure 5-6 d): Elastic Supply
Figure 5-6 e): Perfectly Elastic Supply : dntjnv@yahoo.co.in E = 0 Quantity Price $4.00 Figure 5-6 e): Perfectly Elastic Supply
Figure 5-7: How the price elasticity of supply can vary : dntjnv@yahoo.co.in 0 Quantity Price Figure 5-7: How the price elasticity of supply can vary
THREE APPLICATIONS OF SUPPLY, DEMAND, AND ELASTICITY : dntjnv@yahoo.co.in Good news bad news for farmers
OPEC
Drugs and crime THREE APPLICATIONS OF SUPPLY, DEMAND, AND ELASTICITY
Figure 5-8: An Increase in Supply in the Market for Wheat : dntjnv@yahoo.co.in Increase in Supply $3 Quantity of Wheat Price of Wheat 100 Figure 5-8: An Increase in Supply in the Market for Wheat
Figure 5-9: A Reduction in Supply in the World Market for Oil : dntjnv@yahoo.co.in Quantity of Oil Price of Oil Quantity of Oil Price of Oil (a) Oil Market in the Short Run (b) Oil Market in the Long Run Figure 5-9: A Reduction in Supply in the World Market for Oil
Figure 5-10: Policies to Reduce the of Illegal Drugs : dntjnv@yahoo.co.in Quantity of Drugs Price of Drugs (a) Drug Interdiction (b) Drug Education Q1 Quantity of Drugs Price of Drugs Figure 5-10: Policies to Reduce the of Illegal Drugs
Summary : dntjnv@yahoo.co.in Price elasticity of demand measures how much the quantity demanded responds to changes in the price.
Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
If a demand curve is elastic, total revenue falls when the price rises.
If it is inelastic, total revenue rises as the price rises. Summary
Summary : dntjnv@yahoo.co.in The income elasticity of demand measures how much the quantity demanded responds to changes in consumers’ income.
The cross-price elasticity of demand measures how much the quantity demanded of one good responds to the price of another good.
The price elasticity of supply measures how much the quantity supplied responds to changes in the price. Summary
Summary : dntjnv@yahoo.co.in In most markets, supply is more elastic in the long run than in the short run.
The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price.
The tools of supply and demand can be applied in many different types of markets. Summary
The End : dntjnv@yahoo.co.in The End