L5 - Economics 101:Principles of Microeconomics Professor...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Economics 101:Principles of Microeconomics Professor Jo Hertel Lecture 5: Elasticities The price elasticity of demand The uses of elasticities Price elasticity of demand and revenue Price elasticity of supply Income elasticity of demand Cross-price elasticity of demand 2 R R Reminder: elasticities and taxes price quantity 40 80 120 160 200 240 4 8 12 16 20 S price quantity 40 80 120 160 200 240 4 8 12 16 20 S $4 tax $4 tax D D D D E 2 E 1 p s = p c p s supply and demand elastic: large behavior change, small tax revenue E 1 E 2 supply and demand inelastic: small behavior change, large tax revenue 3 The price elasticity of demand (1) Law of Demand: the quantity demanded decreases as the price increases. The question is, how much does quantity react to the price change? The price elasticity of demand measures the relative change in quantity demanded, proportional to the relative change in price. Price elasticity of demand = % change in quantity demanded % change in price Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition 4 Why the bother with percentages? price quantity (in 1000 of gallons ) 2 3 4 3.5 Madison market for milk total change in q total change in p = 500 1 = 500 price quantity (in mio of gallons ) 2 3 4 3.5 US market for milk total change in q total change in p = 0.5 mio 1 = 0.5 mio Price elasticity of demand = % change in quantity demanded % change in price Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition 5 Conventions with describing the price elasticity of demand (definition slide!) Demand is elastic if the price elasticity of demand is greater than 1: e p >1 Demand is inelastic if the price elasticity of demand is less than 1: e p <1 Demand is unit elastic if the price elasticity of demand is exactly 1: e p =1 % change in quantity > % change in price! % change in quantity < % change in price! % change in quantity = % change in price! e p = % change in quantity % change in price 6 Two Examples p q D 1.00 1.20 1,000 900 A 20% increase in price generates a 10% decrease in the quantity demanded, so e p =0.5 q p D 1.00 1.20 1,000 600 A 20% increase in price generates a 40% decrease in the quantity demanded, so e p =2.0 Price elasticity of demand = % change in quantity demanded...
View Full Document

This note was uploaded on 04/01/2008 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at Wisconsin.

Page1 / 23

L5 - Economics 101:Principles of Microeconomics Professor...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online