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1 Elasticity and its Application Chapter 5
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1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Dec 22, 2015

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Page 1: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

1

Elasticity and its Application

Chapter 5

Page 2: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

2

Price Elasticity

Sensitivity of quantity demanded (or supplied) to a change in price.

PP

QQ

Page 3: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

3

Computing the Price Elasticity of Demand

Demand is price elastic

$5

4Demand

Quantity1000 50

-3percent 22-percent 67

5.00)/2(4.005.00)-(4.00

50)/2(10050)-(100

ED

Price

Page 4: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 1 The Price Elasticity of Demand

Copyright©2003 Southwestern/Thomson Learning

(a) Perfectly Inelastic Demand: Elasticity Equals 0

$5

4

Quantity

Demand

1000

1. Anincreasein price . . .

2. . . . leaves the quantity demanded unchanged.

Price

Page 5: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 1 The Price Elasticity of Demand

(b) Inelastic Demand: Elasticity Is Less Than 1

Quantity0

$5

90

Demand1. A 22%increasein price . . .

Price

2. . . . leads to an 11% decrease in quantity demanded.

4

100

Page 6: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 1 The Price Elasticity of Demand

Copyright©2003 Southwestern/Thomson Learning

2. . . . leads to a 22% decrease in quantity demanded.

(c) Unit Elastic Demand: Elasticity Equals 1

Quantity

4

1000

Price

$5

80

1. A 22%increasein price . . .

Demand

Page 7: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 1 The Price Elasticity of Demand

(d) Elastic Demand: Elasticity Is Greater Than 1

Demand

Quantity

4

1000

Price

$5

50

1. A 22%increasein price . . .

2. . . . leads to a 67% decrease in quantity demanded.

Page 8: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 1 The Price Elasticity of Demand

(e) Perfectly Elastic Demand: Elasticity Equals Infinity

Quantity0

Price

$4 Demand

2. At exactly $4,consumers willbuy any quantity.

1. At any priceabove $4, quantitydemanded is zero.

3. At a price below $4,quantity demanded is infinite.

Page 9: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

9

Revenue

PQ

Page 10: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 2 Total Revenue

Copyright©2003 Southwestern/Thomson Learning

Demand

Quantity

Q

P

0

Price

P × Q = $400(revenue)

$4

100

Page 11: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 3 How Total Revenue Changes When Price Changes: Inelastic Demand

Copyright©2003 Southwestern/Thomson Learning

Demand

Quantity0

Price

Revenue = $100

Quantity0

Price

Revenue = $240

Demand$1

100

$3

80

An Increase in price from $1 to $3 …

… leads to an Increase in total revenue from $100 to $240

Page 12: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 4 How Total Revenue Changes When Price Changes: Elastic Demand

Copyright©2003 Southwestern/Thomson Learning

Demand

Quantity0

Price

Revenue = $200

$4

50

Demand

Quantity0

Price

Revenue = $100

$5

20

An Increase in price from $4 to $5 …

… leads to an decrease in total revenue from $200 to $100

Page 13: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

13

Other Elasticity Measures

• Price elasticity of supply

• Cross price elasticity

• Income elasticity

Page 14: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 6 The Price Elasticity of Supply

Copyright©2003 Southwestern/Thomson Learning

(a) Perfectly Inelastic Supply: Elasticity Equals 0

$5

4

Supply

Quantity1000

1. Anincreasein price . . .

2. . . . leaves the quantity supplied unchanged.

Price

Page 15: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 6 The Price Elasticity of Supply

Copyright©2003 Southwestern/Thomson Learning

(b) Inelastic Supply: Elasticity Is Less Than 1

110

$5

100

4

Quantity0

1. A 22%increasein price . . .

Price

2. . . . leads to a 10% increase in quantity supplied.

Supply

Page 16: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 6 The Price Elasticity of Supply

Copyright©2003 Southwestern/Thomson Learning

(c) Unit Elastic Supply: Elasticity Equals 1

125

$5

100

4

Quantity0

Price

2. . . . leads to a 22% increase in quantity supplied.

1. A 22%increasein price . . .

Supply

Page 17: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 6 The Price Elasticity of Supply

Copyright©2003 Southwestern/Thomson Learning

(d) Elastic Supply: Elasticity Is Greater Than 1

Quantity0

Price

1. A 22%increasein price . . .

2. . . . leads to a 67% increase in quantity supplied.

4

100

$5

200

Supply

Page 18: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

Figure 6 The Price Elasticity of Supply

Copyright©2003 Southwestern/Thomson Learning

(e) Perfectly Elastic Supply: Elasticity Equals Infinity

Quantity0

Price

$4 Supply

3. At a price below $4,quantity supplied is zero.

2. At exactly $4,producers willsupply any quantity.

1. At any priceabove $4, quantitysupplied is infinite.

Page 19: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

19

Applications of Elasticity

Page 20: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

20

Bumper Crops

Page 21: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

21

OPEC & Oil Prices

Page 22: 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

22

The War on Drugs