101 lecture 5 elasticity
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This document provides an overview of key concepts in elasticity, including: - Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity divided by the percentage change in price. - Cross-price elasticity of demand measures the responsiveness of quantity demanded of one good to a price change in another. It indicates if goods are substitutes or complements. - Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. It indicates if a good is inferior, normal, or a luxury. - Price elasticity of supply measures the responsiveness of quantity supplied to a change in price.
101 lecture 5 elasticity
- 1. Microeconomics Chapter 5 ! Elasticity
- 2. 100 90 80 70 60 50 40 30 20 10 0 Movement along the Demand Curve 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Price changes ! demand curve does not change ! quantity demanded changes
- 3. Shift in the Demand Curve 100 90 80 70 60 50 40 30 20 10 0 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Price does not change ! demand curve shifts ! quantity demanded changes
- 4. Movement or Shift? Variable Change Movement Shift Price Income Related Goods Tastes Population and Demographics Expectations
- 5. Key Terms elasticity price elasticity of demand total revenue total expenditure income elasticity of demand cross-price elasticity of demand price elasticity of supply
- 6. ELASTICITY EQUATION BENCHMARK Price Demand MPF Cross- Price Income Price Supply Inelastic | Elastic 1 Compliments | Substitutes 0 Inferior | Normal | Luxury 0 1 Inelastic | Elastic 1 %ΔQD %ΔP ΔQ x P Q ΔP %ΔQD1 %ΔP2 %ΔQD %ΔI %ΔQS %ΔP
- 9. Elasticity If I change one thing does another thing also change?
- 10. Elasticity A measure of how much one economic variable responds to changes in another economic variable
- 11. Price Elasticity of Demand % % QD P Percentage Change in Quantity Demanded Percentage Change in Price
- 12. Demand Schedule Price Quantity Total Revenue 90 1 90 80 2 160 70 3 210 60 4 240 50 5 250 40 6 240 30 7 210 20 8 160 10 9 90 Total Revenue Curve 260 208 156 104 52 0 10 20 30 40 50 60 70 80 90 Total Revenue Price Per Pizza
- 13. Percentage Change % New - Old Old Ignore units in the scale
- 14. Price Elasticity of Demand 1. Calculate Elasticity 2. Take Absolute Value 3. Compare to benchmark of 1 Inelastic Elastic <1 >1 1
- 15. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1 2 3 4 5 6 7 8 9 10 Gallons - Gasoline Price %rQD %rP (4-5)÷5 (6-3)÷3 -.2 1 .2
- 16. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1 2 3 4 5 6 7 8 9 10 Gallons - Ice Cream Price %rQD %rP (3-5)÷5 (4-3)÷3 -.4 .33 1.2 Price Increase
- 17. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1 2 3 4 5 6 7 8 9 10 Gallons - Ice Cream Price %rQD %rP (5-3)÷3 (3-4)÷4 .66 -.25 2.67 Price Decrease
- 19. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1 2 3 4 5 6 7 8 9 10 Gallons - Ice Cream Price %rQD %rP (3-5)÷5 (4-3)÷3 -.4 .33 1.2 Price Increase
- 20. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1 2 3 4 5 6 7 8 9 10 Gallons - Ice Cream Price %rQD %rP (5-3)÷3 (3-4)÷4 +66% -25% 2.67 Price Decrease
- 21. Midpoint Formula Trick: Flip denominator and multiply Delta Q over Q Bar Delta P over P Bar Q Q P P X =
- 22. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1 2 3 4 5 6 7 8 9 10 Gallons - Ice Cream Price 7 4 1.75 Midpoint Formula rQ Q rP x P 2 4 1 x 3.5
- 24. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1 2 3 4 5 6 7 8 9 10 Gallons - Gasoline Price
- 25. $100.00 $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 3 4.5 6 Gallons - Gasoline Price
- 26. Scales can be deceptive
- 27. ! What determines Price Elasticity of Demand?
- 28. Close Substitutes Passage of Time Luxuries vs. Necessities Definition of Market Share of Budget
- 29. Close Substitutes Elastic >1 Inelastic <1
- 30. Passage of Time More Time More Elastic
- 31. Luxuries vs. Necessities Elastic Inelastic
- 32. Definition of Market Demand for Gasoline in General Demand for Gasoline in Rexburg Elastic Inelastic
- 33. Share of the Budget Small Large Inelastic Elastic
- 34. ! Price Elasticity and Total Revenue
- 35. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $3.00 x 5 = $15 Net Gain = $9 1 2 3 4 5 6 7 8 9 10 Gallons - Gasoline Price $6.00 x 4 = $24 Inelastic (<1) Raising prices will increase total revenue Lose Gain Total Revenue TR = P x Q
- 36. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $3.00 x 5 = $15 Net Gain = -$3 1 2 3 4 5 6 7 8 9 10 Gallons - Ice Cream Price $4.00 x 3 = $12 Elastic (>1) Raising prices will decrease total revenue Lose Gain Total Revenue TR = P x Q
- 37. ! Cross-Price Elasticity of Demand
- 38. Cross-Price Elasticity of Demand % % QD P Percentage Change in Quantity Demanded of one good Percentage Change in Price of another good 1 2
- 39. Cross-Price Elasticity of Demand 1. Calculate Elasticity 2. Compare to benchmark of 0 Compliments Substitutes <0 >0 0
- 40. % % QD1 P2 35% 50% =.7 >0 Substitutes
- 41. % % QD1 P2 -40% 50% =-.8 <0 Compliments
- 42. Cross-Price Elasticity of Demand Compliments Substitutes <0 >0 0 % % QD P 1 2
- 43. ! Income Elasticity of Demand ! Normal, Inferior, or Luxury?
- 44. Income Elasticity of Demand % % QD I Percentage Change in Quantity Demanded Percentage Change in Income
- 45. Income Elasticity of Demand 1. Calculate Elasticity 2. Compare to benchmark of 0 and 1 Inferior Normal Luxury <0 0 1 >1
- 46. % % QD I 10% 20% =.5 >0 <1 Normal
- 47. % % QD I -50% 20% =-2.5 <0 Inferior
- 48. % % QD I 100% 20% = 5 >1 Luxury
- 49. Income Elasticity of Demand % % Inferior Normal Luxury <0 0 1 >1 QD I
- 50. ! Price Elasticity of Supply !
- 51. Price Elasticity of Supply % % QS P Percentage Change in Quantity Supplied Percentage Change in Price
- 52. Price Elasticity of Supply 1. Calculate Elasticity 2. Compare to benchmark of 1 Inelastic Elastic <1 >1 1
- 53. % % QS P 10% 20% =.5 <1 Inelastic
- 54. % % QS P 40% 20% = 2 >1 Elastic
- 55. Price Elasticity of Supply Inelastic Elastic <1 1 >1 % % QS P
- 56. ! What determines Price Elasticity of Demand?
- 57. Close Substitutes Passage of Time Luxuries vs. Necessities Definition of Market Share of Budget
- 58. Cross-Price Elasticity of Demand 1. Calculate Elasticity ! %ΔQD1 %ΔP2 ! 2. Compare to benchmark of 0 Compliments Substitutes <0 >0 0
- 59. Income Elasticity of Demand 1. Calculate Elasticity ! ! 2. Compare to benchmark of 0 and 1 Inferior Normal Luxury <0 0 1 >1 %ΔQD %ΔI
- 60. ELASTICITY EQUATION BENCHMARK Price Elasticity of Demand Midpoint Formula Cross-Price Elasticity Income Elasticity Price Elasticity of Supply Inelastic | Elastic 1 Compliments | Substitutes 0 Inferior | Normal | Luxury 0 1 Inelastic | Elastic 1 %ΔQD %ΔP ΔQ x P Q ΔP %ΔQD1 %ΔP2 %ΔQD %ΔI %ΔQS %ΔP
- 61. Elasticity Quiz 1. Prices increase from $5.00 to $6.00. Quantity demanded decreases from 100 units to 80 units.! ! What is the price elasticity of demand?! What is the total revenue at $5.00 per unit?! What is the total revenue at $6.00 per unit?! ! 2. If I increase prices from $20 to $25, quantity demanded decreases from 1,000 units to 900 units. Should I raise prices? Why?! ! 3. Prices increase from $10 to $15 for product A. Quantity demanded for product B increases from 500 units to 600 units! ! What is the cross-price elasticity of demand? Are these products compliments or substitutes?! ! 4. Prices increase from $10 to $15 for product C. Quantity demanded for product B decreases from 40 units to 30 units! ! What is the cross-price elasticity of demand? Are these products compliments or substitutes?! ! 5. Your income increase from $10 to $15 per hour. Quantity demanded for product E decreases from 20 units to 15 units! ! What is the income elasticity of demand? Is this product an inferior, normal, or luxury good?! ! 6. Your income decreases from $12 to $10 per hour. Quantity demanded for product F increases from 10 units to 12 units! ! What is the income elasticity of demand? Is this product an inferior, normal, or luxury good?!
- 62. 1. Prices increase from $5.00 to $6.00. Quantity demanded decreases from 100 units to 80 units.! ! What is the price elasticity of demand?! Midpoint Formula ! ! ΔQ ! x P 20 Q ΔP ! What is the total revenue at $5.00 per unit?! ! $5 x 100 = $500! ! What is the total revenue at $6.00 per unit?! ! $6 x 80 = $480 x 5.50 110 1.22 = = = 90 1 90