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Elasticity Elasticity
What is Price Elasticity?When you hear
“Elasticity”… it is referring to Price Elasticity
What is Price Elasticity?When you hear
“Elasticity”… it is referring to Price Elasticity
Elasticity: A measure of the responsiveness of Qd or Qs to a change in Price
There are four types of Elasticity you will need to master for the AP Exam are:
Price Elasticity of Demand Income Elasticity (of Demand) Cross Elasticity (of Demand) Price Elasticity of Supply
Elasticity: A measure of the responsiveness of Qd or Qs to a change in Price
There are four types of Elasticity you will need to master for the AP Exam are:
Price Elasticity of Demand Income Elasticity (of Demand) Cross Elasticity (of Demand) Price Elasticity of Supply
Price Elasticity of Demand Price Elasticity of Demand
Ed = |%∆Qd / %∆P|
If Ed < 1 [Inelastic]If Ed = 1 [Unit Elastic]If Ed > 1 [Elastic]
*answer will naturally be a negative number (due to inverse relationship)… so we take the absolute value to find Ed
Ed = |%∆Qd / %∆P|
If Ed < 1 [Inelastic]If Ed = 1 [Unit Elastic]If Ed > 1 [Elastic]
*answer will naturally be a negative number (due to inverse relationship)… so we take the absolute value to find Ed
Examples of Perfection?Examples of Perfection?
Ed = 0 Ed = ∞Ed = 0 Ed = ∞
DETERMINANTS of DEMAND
Ed tends to be ELASTIC if…
DETERMINANTS of DEMAND
Ed tends to be ELASTIC if… Substitutes are available Product price makes up a larger
portion of the consumer’s income The product is a luxury The consumer has adjustment time
to make changes in behavior, making the product less necessary
Substitutes are available Product price makes up a larger
portion of the consumer’s income The product is a luxury The consumer has adjustment time
to make changes in behavior, making the product less necessary
Visualizing Elasticity Visualizing Elasticity
Relatively ELASTIC Relatively INELASTIC
This type of visual comparison is only useful when the scales are the same (otherwise scales can change the look of a curve)
Relatively ELASTIC Relatively INELASTIC
This type of visual comparison is only useful when the scales are the same (otherwise scales can change the look of a curve)
Income Elasticity (of Demand)Income Elasticity (of Demand)
EI = %∆Qd/ %∆Income
If answer is positive: NORMAL good
If answer is negative: INFERIOR good
EI = %∆Qd/ %∆Income
If answer is positive: NORMAL good
If answer is negative: INFERIOR good
Cross Elasticity (of Demand)Cross Elasticity (of Demand)
Ex,y = %∆Qdx/ %∆Py
If answer is positive: X and Y are SUBSTITUTES
If answer is negative: X and Y are COMPLEMENTS
If answer is zero: X and Y are UNRELATED
Ex,y = %∆Qdx/ %∆Py
If answer is positive: X and Y are SUBSTITUTES
If answer is negative: X and Y are COMPLEMENTS
If answer is zero: X and Y are UNRELATED
Price Elasticity of SupplyPrice Elasticity of Supply
Es = %∆Qs / %∆P
If Es < 1 [Inelastic]
If Es = 1 [Unit Elastic]
If Es > 1 [Elastic]
*answer should never be less than zero
Es = %∆Qs / %∆P
If Es < 1 [Inelastic]
If Es = 1 [Unit Elastic]
If Es > 1 [Elastic]
*answer should never be less than zero
Elasticity of a Straight-Line Demand Curve
Elasticity of a Straight-Line Demand Curve
Use the following data to construct a correctly labeled Demand Curve.
Based on what you know about Elasticity… what is the elasticity of this product?
Use the following data to construct a correctly labeled Demand Curve.
Based on what you know about Elasticity… what is the elasticity of this product?
Price Qd
6 05 14 23 32 41 5
.01 6
If price is decreasing and total revenue is increasing then the product is ELASTIC
_________________
If price is decreases and total revenue decreases then the product is INELASTIC
_________________
If price changes, but total revenue stays the same the product is UNIT ELASTIC
Total Revenue Test [TR=P*Q]Total Revenue Test [TR=P*Q]
Summary: ElasticitySummary: Elasticity
Definition Factors that determine Price Elasticity How to calculate the 4 types of Elasticity How elasticity affects relationships between
goods. Normal vs. Inferior Goods Compliment vs. Substitutes
Using the Total Revenue Test Relationship between…
TR, MR, and point of Ed=0 [preview for next unit]
Definition Factors that determine Price Elasticity How to calculate the 4 types of Elasticity How elasticity affects relationships between
goods. Normal vs. Inferior Goods Compliment vs. Substitutes
Using the Total Revenue Test Relationship between…
TR, MR, and point of Ed=0 [preview for next unit]
Free Response QuestionFree Response QuestionOnce upon a time there was a college student who
had to stay up studying many nights in a row. Soon the student had a caffeine addiction and bought Starbucks coffee. He would buy 35 coffees per semester at $2.00 each. When the student came back in the spring he found coffee to now be $3.00. Due to the income effect, he can no longer afford as many coffees even though he is addicted. He now only buys 20 coffees per semester.
1) Is the Ed elastic or inelastic for Coffee? 2) Calculate the Ed for Coffee for this college
student
Once upon a time there was a college student who had to stay up studying many nights in a row. Soon the student had a caffeine addiction and bought Starbucks coffee. He would buy 35 coffees per semester at $2.00 each. When the student came back in the spring he found coffee to now be $3.00. Due to the income effect, he can no longer afford as many coffees even though he is addicted. He now only buys 20 coffees per semester.
1) Is the Ed elastic or inelastic for Coffee? 2) Calculate the Ed for Coffee for this college
student
Multiple ChoiceMultiple ChoiceIf the price of lunch at the school cafeteria
increases and the cafeteria’s total revenue from lunches remains constant, we can conclude that the elasticity of demand for a school lunch is…
a) Elasticb) Perfectly Elasticc) Perfectly Inelasticd) Unit Elastice) Inelastic
If the price of lunch at the school cafeteria increases and the cafeteria’s total revenue from lunches remains constant, we can conclude that the elasticity of demand for a school lunch is…
a) Elasticb) Perfectly Elasticc) Perfectly Inelasticd) Unit Elastice) Inelastic
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