Chapter 20 graphs.pdf - 20 ELASTICITY Law of Demand and...

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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 Drug-Related 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 Drug-Belated Crime ill 82(Vafterrthe , Price (dollars) 50 —————— n._:_ _ I ‘ A Price Elasticity of Demand Along a Straight-Line Demand Curve l Inelastic >In (a), the price elasticity of -------------- demand varies along the ‘ straight-line downward-sloping 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 straight-line downward-sloping demand curve, price elasticr demand IS equal to 1 (Ed = &\ 0 m agfltgéd Price Elasticity of Demand Along a Straight-Line 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-. 16-00 —————— B Si Tax $1 Tm I: A [dollarsl [dollarsl ...
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