Micro- and Macroeconomics - Elasticities of demand and supply.pdf

# Micro- and Macroeconomics - Elasticities of demand and supply.pdf

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Elasticities of demand and supply Micro-and Macroeconomics 4th lecture 1

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The demand for football tickets For given prices of related goods and consumer incomes, higher ticket prices reduce the quantity of tickets demanded. How can firms increase their revenues? 0 2 4 6 8 10 12 14 0 20 40 60 80 100 Ticketprice(\$) Quantityof tickets(thousands) 2
The price elasticity of demand The (own-)price elasticity of demand (also: demand elasticity) is the percentage change in the quantity demanded divided by the corresponding percentage change in its price. ε D = = q Δ q p Δ p q Δ p p Δ q It measures the sensitivity of quantity demanded to changes in the own price of a good, holding constant the prices of other goods and income. Demand elasticities are (almost always) negative since demand curves slope down. In general, the demand elasticity changes as we move along a given demand curve. Along a straight-line demand curve, elasticity falls as demand falls. ε D = Δ q% Δ p% 3

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The demand for football tickets (1) Price (\$/ticket) (2) Tickets demanded (000s) (3) Price elasticity of demand 12.50 0 - 10.00 20 -4 7.50 40 -1.5 5.00 60 -0.67 2.50 80 -0.25 0 100 0 4
A nonlinear demand curve When a demand curve is nonlinear, price rises and price cuts of equal size lead to quantity changes that differ in size. q= 100/p 0 2 4 6 8 10 12 0 20 40 60 80 100 Ticketprice(\$) Quantityof tickets(thousands) ε D = = p q q p ln(p) ln(q[p]) Economistsresolvethisambiguity aboutthedefinitionofelasticities bydefiningitwithrespectto verysmallchangesinprice: 5

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Elastic and inelastic demand
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