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ELASTICITY
How quantity demanded or supplied changes with changes in price
Determinants of Price Elasticity of Demand
Necessities versus Non-necessities
Availability of Close Substitutes
Definition of the Market
Time Horizon
Price Elasticity of Demand
pricein change Percentage
ddemandequantity in change PercentageEd
dP %
dQ %Ed
How to calculate the Price Elasticity of Demand
i
if
i
if
PPP
QQQ
dP %
dQ %
i = initial and f = final
ExampleIf the price of a unit of the good increases from $4 to $5 and the amount you buy falls from 100 to 50 units/week then your elasticity of demand would be calculated as:
2.25
50.
44)(5
100100)(50
PiPi - Pf
QiQi - Qf
How to Interpret Elasticity
A price elasticity of –2 means that: if price increases by 1%, quantity demanded decreases by 2%.
Unit Elastic Demand: Elasticity equals -1
Quantity
Price
$5A 25%increasein price...
Demand
75...leads to a 25% decrease in quantity demanded.
100
$4
Ed = %dQ %dP
-.25 .25
= -1
Elastic Demand: Elasticity is greater than –1
Quantity
Price价格
$5A 25%increasein price...
Demand
50...leads to a 50% decrease in quantity demanded.
100
$4
Ed = %dQ %dP = -.50
.25 = -2
Inelastic Demand: Elasticity is less than –1
Quantity
Price
$4
$5A 25%increasein price...
Demand
90...leads to a 10% decrease in quantity demanded.
100
Ed = %dQ %dP -.10 .25 = -.4
Elasticity and Total Revenue: Inelastic demand
Quantity
Price
$4
$5A 25%increasein price...
Demand
10090...leads to a 10% decrease in quantity demanded.
P Revenue increases
Revenue = $400
Revenue = $450
Elasticity and Total Revenue: Elastic demand
Quantity
Price价格
$4
$5A 25%increasein price...
Demand
10050...leads to a 50% decrease in quantity demanded.
P Revenue decreases
Revenue = $400
Revenue = $250
Crude Oil Prices $/
bar
rel
Nominal $ Inflation-adjusted 2011 US$
Supply: Crude Oil Production
000s
bar
rels
/day
0.25.5
125.
2020) - (30
6464)(56
P%
Q%
Estimating Demand Elasticity for Oil1979-80
Year
19791980
Price$/barrel
$20 $30
QuantityBarrels/day (millions)
64 56
and a proportionately smaller decrease (12.5%) in quantity sold.
Effect of Decrease in Supply in Oil Market with Inelastic Demand
30
Barrels/day (millions) 560
$/barrel When demand is inelastic, a decrease in supply...
Demand
S2 S1
20
64
leadsto a large increase in price (50%)
Revenue= $1280
Revenue = $1680
and a proportionately larger decrease (22%) in quantity sold.
Effect of Decrease in Supply in Oil Market with Elastic Demand
22
Barrels/day (millions)
500
$/barrel When demand is elastic, a decrease in supply...
Demand
S2 S1
20
64
leadsto a small increase in price (10%) Revenue = $1280
Revenue = $1100
and a proportionately smaller increase (10%) in quantity sold.
Effect of Increase in Supply in Wheat Market with Inelastic Demand
3
Bushels per day (millions) 3000
$/bushelWhen demand is inelastic,an increase in supply...
Demand
S1
S2
2
330
leadsto a large decrease in price (50%)
Revenue= $900
Revenue = $660
Elastic SupplyElasticity is greater than 1
Quantity
Price
4
$5A 25%increasein price...
200100
Supply
...leads to a 100% increase in quantity supplied.
Es = %dQ %dP = 1.00 .25 = 4
Inelastic SupplyElasticity is less than 1
Quantity
Price
4
$5A 25%increasein price...
110100
Supply
...leads to a 10% increase in quantity supplied.
Es = %dQ %dP = .10 .25 = 0.4