Elasticity Of Demand
- 2. Elasticity The responsiveness of quantities demanded and supplied to changes in price Price Elasticity of Demand The effect of the change is the numerator of the equation (people buying more or less) The cause is the denominator (the change in price that affects people’s buying decisions) Coefficient of demand elasticity = % change in quantity demanded % change in price
- 3. Formula for Calculating Elasticity Q1 is Initial Quantity Q2 is Final Quantity P1 is Initial Price P2 is Final Price
- 4. Example A gas station sells 10 million litres of gas a month for $0.50 per litre. If the price is raised to $0.54 per litre, the quantity demanded falls to 9.5 million litres. Q1 = 10 Q2 = 9.5 P1 = 0.50 P2 = 0.54 E d = 0.67
- 5. Inelastic Demand If the elasticity of demand is less than one, demand is inelastic. This occurs when the percentage change in quantity demanded is less than percentage change in price.
- 6. Inelastic Demand The demand that exists when price changes do not result in significant changes in the quantity of a product demanded. Quantity is less responsive to changes in price. Visually, it is a steep line. Quantity Price Big change in price Small change in quantity
- 7. Elastic Demand If the elasticity of demand is greater than one, demand is elastic. This occurs when the percentage change in quantity demanded is greater than percentage change in price.
- 8. Elastic Demand Demand for a product that changes substantially in response to small changes in price. Quantity is more responsive to changes in price. Visually, it is a less steep line. Quantity Price Small change in price Big change in quantity
- 9. Unitary Elasticity When the % change in quantity is the same as the % change in price, demand is unit elastic. The elasticity of demand = 1. A change in price will result in an identical change in demand. On a graph, a unitary elastic demand curve will have a slope of 1. change in price change in quantity Quantity Price
- 10. Elasticity and Revenue For goods with inelastic demand coefficients, when price rises, total revenues rise. When price falls, total revenue falls. For goods with elastic demand coefficients, when price rises, total revenues fall. When price falls, total revenues rise. For goods with unitary demand coefficients, when price rises or falls, total revenues stay the same.
- 11. Factors Affecting Demand Elasticity Availability of substitutes: goods that have substitutes generally are more elastic that goods that don’t. Nature of the item: goods that are necessities tend to be more inelastic than goods that are considered to be luxuries. Fraction of income spent on the item: goods that are expensive (take up a larger part of income) are elastic; goods that take up a small percentage of income are inelastic. Amount of time available: goods, over time, become more elastic as consumers find substitutes for them.
- 12. Questions If the quantity of strawberries demanded by consumers increases by 2 percent when the price decreases by 10 percent, what is the price elasticity of demand for strawberries? The price elasticity of the demand for prime cut beef has been estimated to be 0.55. What does this mean? Is the demand elastic or inelastic?
- 13. Elasticity of Supply Measures how responsive the quantity supplied by a seller is to a rise or fall in price. Coefficient of supply elasticity = % change in quantity supplied % change in price
- 14. Elasticity of Supply Coefficient greater than 1 = elastic supply When price increases, the manufacturer is able to increase quantity supplied at an even greater rate. Coefficient less than 1 = inelastic supply When price increases, the seller cannot increase the quantity supplied by a greater percentage than the percentage increase in price. Coefficient equals 1 = unitary elasticity When price increases, the seller can just match the percentage increase in price with a percentage increase in quantity supplied.
- 15. Factors Affecting Supply Elasticity Time The longer the time period a seller has to increase supply, the more elastic the supply will be. Quantity Price Short term supply Long term supply
- 16. Factors Affecting Supply Elasticity Ease of storage Products that are easier to store have a higher elasticity than products that are difficult to store. Cost factors The less it costs to increase production, the more elastic the supply is.