12. elasticity and its application gp
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This document discusses elasticity and its application. It defines elasticity as a measure of how much buyers and sellers respond to changes in market conditions. It then discusses types of elasticity including price elasticity of demand, income elasticity of demand, and cross price elasticity of demand. Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. The document provides formulas and examples for computing different elasticities. It also outlines factors that determine the elasticity of demand.
![Computing the Price Elasticity of
Demand Using the Midpoint
Formula
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.
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![Computing the Price Elasticity
of Demand
Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones the your elasticity of demand, using the
midpoint formula, would be calculated as:
32.2
5.9
22
2/)20.200.2(
)00.220.2(
2/)810(
)810(
==
+
−
+
−
percent
percent
)/2]P)/[(PP(P
)/2]Q)/[(QQ(Q
=DemandofElasticityPrice
1212
1212
+−
+−](https://image.slidesharecdn.com/12-181017104842/85/12-elasticity-and-its-application-gp-9-320.jpg)
12. elasticity and its application gp
- 2. Elasticity . . . … is a measure of how much buyers and sellers respond to changes in market conditions … allows us to analyze supply and demand with greater precision. Journal Question-Name 3 necessities and 3 luxuries that you would buy.
- 3. Price Elasticity of Demand Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
- 4. Computing the Price Elasticity of Demand The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price Elasticity = Percentage Change in Qd Of Demand Percentage Change in Price
- 5. Elasticity, Percentage Change and Slope 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. But instead of looking at unit change, elasticity looks at percentage change. What do we mean by percentage change?
- 7. Computing the Price Elasticity of Demand price inchange Percentage demandedquatity inchange Percentage demand of elasticityPrice = Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as: 2 percent10 percent20 100 002 002202 100 10 810 == × − × − . )..( )(
- 8. Computing the Price Elasticity of Demand Using the Midpoint Formula 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. )/2]P)/[(PP(P )/2]Q)/[(QQ(Q =DemandofElasticityPrice 1212 1212 +− +−
- 9. Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as: 32.2 5.9 22 2/)20.200.2( )00.220.2( 2/)810( )810( == + − + − percent percent )/2]P)/[(PP(P )/2]Q)/[(QQ(Q =DemandofElasticityPrice 1212 1212 +− +−
- 10. Ranges of Elasticity Inelastic Demand Percentage change in price is greater than percentage change in quantity demand. Price elasticity of demand is less than one. Elastic Demand Percentage change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one.
- 11. Perfectly Inelastic Demand - Elasticity equals 0 Quantity Price 4 $5 Demand 100 2. ...leaves the quantity demanded unchanged. 1. An increase in price...
- 12. Inelastic Demand - Elasticity is less than 1 Quantity Price 4 $51. A 25% increase in price... Demand 10090 2. ...leads to a 10% decrease in quantity.
- 13. Unit Elastic Demand - Elasticity equals 1 Quantity Price 4 $51. A 25% increase in price... Demand 10075 2. ...leads to a 25% decrease in quantity.
- 14. Elastic Demand - Elasticity is greater than 1 Quantity Price 4 $51. A 25% increase in price... Demand 10050 2. ...leads to a 50% decrease in quantity.
- 15. Perfectly Elastic Demand - Elasticity equals infinity Quantity Price Demand$4 1. At any price above $4, quantity demanded is zero. 2. At exactly $4, consumers will buy any quantity. 3. At a price below $4, quantity demanded is infinite.
- 16. Determinants of Price Elasticity of Demand Necessities versus Luxuries Availability of Close Substitutes Definition of the Market Time Horizon
- 17. Determinants of Price Elasticity of Demand Demand tends to be more inelastic If the good is a necessity. If the time period is shorter. The smaller the number of close substitutes. The more broadly defined the market.
- 18. Determinants of Price Elasticity of Demand Demand tends to be more elastic : if the good is a luxury. the longer the time period. the larger the number of close substitutes. the more narrowly defined the market.
- 19. Elasticity and Total Revenue 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
- 20. $4 Demand Quantity P 0 Price P x Q = $400 (total revenue) 100 Q Elasticity and Total Revenue
- 21. The Total Revenue Test for Elasticity INELASTIC DEMAND ELASTIC DEMAND Decrease in Price ELASTIC DEMAND INELASTIC DEMAND Increase in Price Decrease in Total Revenue Increase in Total Revenue
- 22. An Example of an Inelastic Good Oil and Oil Prices This video will show the supply side issues with getting oil out of the ground. Then the video will focus on the demand (us!) issues of using oil. Insert Economics Video File 1 and play Arab Oil clip.
- 23. Income Elasticity of Demand 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.
- 24. Computing Income Elasticity Income Elasticity of Demand Percentage Change in Quantity Demanded Percentage Change in Income =
- 25. Income Elasticity - Types of Goods - Normal Goods Income Elasticity is positive. Inferior Goods Income Elasticity is negative. Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.
- 26. Cross Price Elasticity of Demand Elasticity measure that looks at the impact a change in the price of one good has on the demand of another good. % change in demand Q1/% change in price of Q2. Positive-Substitutes Negative-Complements.