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**Unformatted text preview: **Introduction to microeconomics Wednesday, September 116, 2009 price elasticity of demand income elasticity of demand cross-price elasticity of demand price elasticity of supply What factors influence the size of these various elasticities? Elasticity measures The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign). Technically, elasticity is defined for each point on the demand curve (point elasticity). In practice we approximate the elasticity over a segment (arc) of the demand curve (arc elasticity). Elasticity of demand = Price/ Quantity divided by the slope of the demand curve. A u to S h a p e 2 A u to S h a p e 2 A C B O E F D ε = (P/Q) ÷ Slope at point A P = OB Q= OE Slope = BC/BA =BC/OE Therefore; ε = Calculating the elasticity of demand at point A (a short cut) A u to S h a p e 1 3 A u to S h a p e 1 4 A u to S h a p e 2 8 The midpoint method is a technique for calculating the percent change over an segment of the demand curve. In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values. Demand for Vaccinations When price rises to $21 per barrel, world demand falls to 9.9 million barrels per day (point B). D 10.0 9.9 $21 20 Price of vaccination Quantity of vaccinations (millions) B A Good Price elasticity Inelastic demand Eggs 0.1 Beef 0.4 Stationery 0.5 Gasoline 0.5 Elastic demand Housing 1.2 Restaurant meals 2.3 Airline travel 2.4 Foreign travel 4.1 Should distinguish between short run and long run elasticities Price elasticity of demand<1 Price elasticity of demand>1 Demand is elastic if ( the absolute value of ) the price elasticity of demand is greater than 1. Demand is inelastic if ( the absolute value of ) the price elasticity of demand is less than 1. Demand is unit-elastic if ( the absolute value of ) the price elasticity of demand is exactly 1. D 1 … leaves the quantity demanded unchanged. An increase in price… 1 Quantity of shoelaces (billions of pairs per year) (a) Perfectly Inelastic Demand: Price Elasticity of Demand = 0 $3 $2 Price of shoelaces (per pair) At any price above $5, quantity demanded is zero At exactly $5, consumers will buy any quantity At any price below $5, quantity demanded is infinite D 2 (b)...

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