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Unformatted text preview: 20 ELASTICITY Law of Demand and Price Elasticity > Suppose price rises by 10 percent. As a result, quantity
demanded falls, but by what percentage does it fall? > The notion of price elasticity of demand can help answer
this question. Elasticity Is Not Slope Price
II .
(do ars) >For a 11near demand
12 — — — I function (straight line)
: slope is constant
10 _ _ _. _ _ _ >E1asticity (Ed) changes
: : along the demand
I  curve.
I 
l I D
[  
o 50 100 Quantity Deman,_, A . I w Calculating Price Elasticity of Demand  Calculating Price Elasticity of Demand ll When calculating price
elasticity of demand, we
use the average of the two
prices and the average of
the two quantities
demanded. The formula for
price elasticity of demand 15: Aad
Ed = Price
(dollars) D 0d Average
AP 0 50 1 00 Quantity P—
Mera o Demanded I: H’ Calculating Price Elasticity of Demand III For example, the Price  
calculation 15: (dollars) O 50 1 00 Quantity
Dema . , Graphical Representation of
Price Elastic Demand >The percentage change
in quantity demanded is
greater than the Ed > _1
Elastlc 5 P2 ______ ercenta e chan e in
0: P1 _________ P . g g
pr1ce.
>Quantity demanded
changes proportionately
0 02 Q1 more than price changes. Graphical Representation of Price Inelastic Quantity Demanded Graphical Representation of Price Unitary
Elastic Demand >The percentage Ed = 1 change in quantity
Unit Elastic demanded is equal to 8 P2 the percentage change
0"— p1 in price.
>Quantity demanded
I I changes
' ' ro ortionatel to
0 Q2 Q1 p p y . , , _
Quantitv Demanded W Graphical Representation of Perfectly Elastic
Demand A small percentage
(D Ed ___ 00 change in price causes
.g Perfectly Elastic an extremely large
0— percentage change in
quantity demanded
(from buying all to buying nothing). 0 Q1
Quantity Demanded
(d) Graphical Representation of Perfectly Price
Inelastic Demand E = o d
Perfectly Inelastic Quantity demanded
does not change as price changes. Quantity Demanded m Inelastic Demand and Total Revenue l Elastic Demand and Total Revenue II > Demand is elastic between points A and B. > A fall in price, from P1 to P2, will
increase the size of the total
revenue rectangle from 0P1AQ1 to
OPZBQZ. > A rise in price, from P2 to P1, will
decrease the size of the total
revenue rectangle from 0P2BQ2 to
0P1AQ1. > In other words, when demand is
elastic, price and total revenue are 0 Q1 Q2 inversely related Quantity Demanded “MM . . t . t .2;
Drug Busts and DrugRelated Crime  >P = price of cocaine, Q =
quantity of cocaine, and TR = 82 (after the (dPrlilce) drug bust) s1(before the total revenue from selling
0 ars .
drug bus” cocaine.
>At a price of $50 for an ounce
120 ______ of cocaine, equilibrium quantity is 1,000 ounces and total I revenue is $50,000.
>lf $60 of every $100 cocaine
50 —————— purchase is obtained through crime, then $30,000 worth of crime is committed to purchase
0 600 1,000 , $50,000 worth of cocaine. Quantity of Cocaine (ounces) Drug Busts and Drug—Related Crime ll \ ‘ "LALJL .x. \. ﬂxpa 82(after the
drug bust) S1<bef°rethe >As a result of a drug bust, dru bus) 9 t the supply of cocaine shifts
leftward; the price rises and
120 —————— the quantity falls. >Because we have assumed
the demand for cocaine is
inelastic, total revenue rises to
$72,000. Sixty percent of this
comes from criminal activities,
0 600 1,000 or $43,200. Quantity of Cocaine (ounces) __7“ . , _ ‘. x .7 . ._‘:
Drug Busts and DrugBelated Crime ill 82(Vafterrthe , Price
(dollars) 50 —————— n._:_ _ I ‘ A Price Elasticity of
Demand Along a
StraightLine Demand
Curve l Inelastic >In (a), the price elasticity of 
demand varies along the ‘
straightline downwardsloping
demand curve. > There is an elastic range to the
curve (Where Ed > 1) and an
inelastic range (where Ed < 1).
>At the midpoint of any
straightline downwardsloping demand curve, price elasticr
demand IS equal to 1 (Ed = &\ 0 m agﬂtgéd Price Elasticity of
Demand Along a
StraightLine Demand
Curve ll 7O 80 Quantity
Demanded Total Revenue Total Revenue Inelastic >Part (b) shows that in the elastic
range of the demand curve, total
revenue rises as price is lowered. I
>In the inelastic range of the demand I 70 80 Quantity
I

curve, further price declines result in I
E

 Demanded declining total revenue.
>Total revenue reaches its peak when
price elasticity of demand equals 1. Total Revenue Total Revenue (
0 Quantity
(b) Demanded Graphical Representation of Elastic Supply The percentage
Elsa>3ti10 change in quantity 8
.8 P2 _ +— an[ _ _ ‘/ .S1uppl16d ls greater Graphical Representation of Inelastic Supply The percentage
change in 8 P2 _______ Eisefastic quantity
E P1 —————— supplied is less
than the
percentage
O 01 02 change 1n prlce:
Quantity Supplied , ES 1 and supply (b)
Graphical Representation of Unit Elastic
Suppw Page 45 of 58 ‘~ ' s The percentage
change in
_______ Es = 1 quantity supplied
8 P2 Unit Elastic .
LE p1 _____ IS equal to the
percentage change in price:
Es =1 and supply . x  ‘ elastic. 1
Quantity Supplied Pae460f58: _ . Graphical Representation of Perfectly Elastic
Suppw A small change in
price changes
Es _ 0° quantity supplied é Perfectly Elastic by an infinite
o. [:21 8
amount: E5 = 00
and supply is
0 Q1 perfectly elastic. Quantity Supplied LI . my \ \ \ c. Price Elastic Graphical Representation of
Supply A change in price
Es = 0 does not change Perfectly Inelastic . .
g P2 —————— quantity supplied:
EL P1 —————— ES = O and supply
is perfectly
inelastic.
o (31 Quantitv Suoolied Housing Prices and Elasticity of Supply > 81 rep resents the supply of housing in city 1, and 82 represents the supply of
housing in city 2. > 81 has lower elasticity of supply than 82. > Suppose the demand for housing in each city rises from D1 to DZ. As a result, the
price of houses rises in both cities, but it rises by more in city 1 than city 2. In otheI words, the lower the elasticity of supply, the greater the increase in price.
51 (CW 1) <— Lower elasticity
0' supply __________ 82 (city 2) \ Higher elasticity
01 supply Rice (dollars) 82 (after 08x) Part or tax paid
by buyers In
iIerrns of higher
price paid S1 (before tax) 16.00
15.50
15100
14.50 $1 Tax Part or tax paid
by sellers In
terms of lower
price kept  > Quantity of DVDs A $1 tax placed on the sellers of DVDs shifts the supply curve from SI to $2 and raises the
equilibrium price from $15.00 to $15. 50. Part of the tax is paid by buyers through a higher
price paid ($15. 50 instead of $15.00), ' . .
price kept ($14. 50 Instead of $15.00) tax.
8. 52
8.
1600 —————— B Si Tax $1 Tm
I: A [dollarsl
[dollarsl ...
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 Fall '17
 Dyson
 Economics, Price Elasticity, Supply And Demand, cocaine