Microeconomics ELEVENTH EDITION Michael Parkin Chapter 4 Elasticity
Elasticity When Supply decreases, the equilibrium price rises and the equilibrium quantity decreases. 0 5 10 15 20 25 30 0 0.5 1 1.5 2 2.5 3 The Effects of a Change in Supply Quantity (millions of bars per week) Price (dollars per bar) Supply of energy bars (new) Supply of energy bars (original) Demand for energy bars
Elasticity BUT does the price rise by a large amount and the quantity decrease by a small amount? This depends on the responsiveness of the quantity demanded of a good to a change in its price . If the quantity demanded of a good is not very responsive to a change in the price, the price rises a lot and the equilibrium quantity does not change a lot . If the quantity demanded is very responsive to a change in the price, the price barely rises and the equilibrium quantity changes a lot .
Elasticity Let us look at it from the side of the slope of the demand curve. If the demand curve is steep, the quantity demanded is not very responsive to a change in price when compared to almost flat curve.
Elasticity BUT the slope of demand curve depends on the units in which we measure both price and quantity. Sometimes we need to compare the demand of different goods. So, we need a measure that is independent of units measurement.
Price Elasticity of Demand It is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price.
Price Elasticity of Demand
Price Elasticity of Demand A units-free measure : because the percentage change in each variable is independent of the units. Minus sign and elasticity : because as the price rises, the quantity demanded decreases, so the price elasticity of demand is a negative number. BUT it is the absolute number that tells how responsive is the quantity
Inelastic and Elastic Demand If the quantity remains unchanged when the price changes , the price elasticity of demand equals zero and it is called perfectly inelastic demand . For example, insulin that is important for diabetics.
Inelastic and Elastic Demand If the change in the quantity demanded equals the change in price , the price elasticity of demand equals one and it is called unit elastic demand.
Inelastic and Elastic Demand