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Chapter_5_Micro_S09

# Chapter_5_Micro_S09 - Chapter 5 Elasticity Chapter 5...

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5 Chapter Elasticity

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2 Chapter 5: Overview Elasticity Calculating Elasticities Percent changes Midpoint formula Price Elasticity of Demand Along a linear demand curve Elasticity and slope Revenue Determinants Other Elasticities Income Elasticity of Demand Cross-Price Elasticity of Demand (Price) Elasticity of Supply Examples
3 Elasticity Should a firm raise its prices to increase revenues? If price goes up, know that Q D (quantity demanded) goes down. Need to know by how much since Total Revenues=P* Q D. Should the government tax cigarettes or liquor in order to raise money for a program? What types of goods should it tax and how much revenue will be raised? To answer these questions, need to know how responsive quantity demanded and supplied are to price changes.

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4 ELASTICITY: A measure of responsiveness elasticity A general concept used to quantify the response in one variable when another variable changes. B A B A = % % respect to with of elasticity
5 PRICE ELASTICITY OF DEMAND To measure how Q D changes when price changes, we look at the elasticity of demand with respect to price or the price elasticity of demand. price elasticity of demand measures the responsiveness of demand to changes in price. price in change % demanded quantity in change % demand of elasticity price =

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6 PRICE ELASTICITY OF DEMAND Why not just use the slope of demand curve? FIGURE 5.1 Slope Is Not a Useful Measure of Responsiveness: Sensitive to units of measurement
7 PRICE ELASTICITY OF DEMAND Is the price elasticity of demand positive or negative ? If price increases (% change in price >0), then quantity demanded decreases (% change in quantity <0) If price decreases (% change in price <0), then quantity demanded increases (% change in quantity>0) Price elasticity of demand is always negative for a downward sloping demand curve. Note, in the homework , you are asked to take the absolute value of the price elasticity so that you get a positive number.

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8 PRICE ELASTICITY OF DEMAND How responsive is quantity demanded to price changes? Does quantity demanded change a lot, little, not at all? To describe how responsive demand is, we use the following terms: Perfectly Elastic Elastic Unit Elastic Inelastic Perfectly Inelastic More/less elastic/inelastic in comparisons
9 PRICE ELASTICITY OF DEMAND Elastic | price elasticity of demand | >1 Demand is very responsive to price changes The percent change in quantity demanded is larger than the percent change in price (in absolute value) P in change % Q in change % 1 P in change % Q in change % | demand of elasticity Price | then elastic, If D D =

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10 PRICE ELASTICITY OF DEMAND Inelastic | price elasticity of demand | <1 Demand is not very responsive. The percent change in quantity demanded is less than the percent change in price (in absolute value) P in change % Q in change % 1 P in change % Q in change % | demand of elasticity Price | then inelastic, If D D < < =
11 PRICE ELASTICITY OF DEMAND Unit Elastic | price elasticity of demand | =1 (Percent change in quantity demanded exactly equals the percent change in price) P in change % Q in change % 1 P in change % Q in change % | demand of elasticity Price | then inelastic, If D D = = =

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Chapter_5_Micro_S09 - Chapter 5 Elasticity Chapter 5...

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