05_Elasticity SV

# 05_Elasticity SV - In previous chapters the major concerns...

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 1 In previous chapters, the major concerns were with the qualitative responses (law of demand, law of supply, etc) of quantities to price, income and other market variables. i.e. positively or negatively related? In this chapter, we aim to develop a sharper _________ measure of the demand/supply response. The measure is called elasticity . i.e. how substantial is the change in quantity when the price changes?

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 2 You design websites for local businesses (and also you are the only able designer in town). You charge \$200 per website, and currently sell 12 websites per month. Your costs are rising (including the opp. cost of your time), so you’re thinking of raising the price to \$250. The law of demand says that you won’t sell as many websites if you raise your price. How many fewer websites? How much will your revenue fall, or might it increase? A scenario… 0
CHAPTER 5 ELASTICITY AND ITS APPLICATION 3 Elasticity Definition: Elasticity is a numerical measure of the _________ of Q d or Q s to one of its determinants. Basic idea: Elasticity measures how much one variable responds to changes in another variable. 0

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 4 Price Elasticity of Demand ______ elasticity of _______ measures how much Q d responds to a change in P . Price elasticity of demand = Percentage change in Q d Percentage change in P Loosely speaking, it measures the price- sensitivity of buyers’ demand. Reasons for using ________ in the calculation Evade the “unit” problem Make elasticities comparable across goods 0
CHAPTER 5 ELASTICITY AND ITS APPLICATION 5 Price Elasticity of Demand Price elasticity of demand equals 0 P Q D Q 2 P 2 P 1 Q 1 P rises by 10% Q falls by 15% 15% 10% = 1.5 Price elasticity of demand = Percentage change in Q d Percentage change in P Example:

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 6 Price Elasticity of Demand Along a D curve, P and Q move in opposite directions, which would make price elasticity negative. We will drop the minus sign and report all price elasticities as positive numbers. 0 P Q D Q 2 P 2 P 1 Q 1 Price elasticity of demand = Percentage change in Q d Percentage change in P
CHAPTER 5 ELASTICITY AND ITS APPLICATION 7 Calculating Percentage Changes So, to calculate the percentage change, we use the _______ method : 0 end value – start value midpoint x 100% The midpoint is the number halfway between the start & end values, also the average of those values. Midpoint= (end value + start value) /2

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 8 Calculating Percentage Changes Using the midpoint method, the % change in P equals 0 \$250 – \$200 \$225 x 100% = 22.2% The % change in Q equals 12 – 8 10 x 100% = 40.0% The price elasticity of demand equals 40/22.2 = 1.8
CHAPTER 5 ELASTICITY AND ITS APPLICATION 9 Practice: Practice:         Calculate an elasticity Calculate an elasticity

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05_Elasticity SV - In previous chapters the major concerns...

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