Chapter 5 - AGEC105 Chapter5 Elasticities Announcements...

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Chapter 5 Elasticities  AGEC 105
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Announcements Exam 1, Wednesday, September 29, Ch. 1, 3, 4  and 5 Review sessions, Tuesdays, Blocker 113, 7:30- 9:30pm Review problems are posted on E-LEARNING
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Discussion Topics Own price elasticity of demand Income elasticity of demand Cross price elasticity of demand Other general properties Applicability of demand  elasticities
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Key Concepts Covered… Own price elasticity  = % Q beef    for a given    % P beef Income   elasticity  = % Q beef    for a given    % Income Cross price   elasticity  = % Q beef    for a given    % P chicken Arc elasticity  = range along the demand curve Point elasticity  = point on the demand curve Price flexibility  = reciprocal of own price elasticity
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Own Price Elasticity of Demand
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Own Price Elasticity of  Demand Own price  elasticity  of demand Percentage change in quantity  Percentage change in price = Point Elasticity Approach
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Own Price Elasticity of  Demand Point elasticity: = [ Q ÷ ∆ P]  ×   [P a ÷ Q a ] Own price  elasticity  of demand Own price  elasticity  of demand Percentage change in quantity  Percentage change in price = Q = (Q a  – Q b ); and  P = (P a  – P b ) The subscript “a” here stands for “after” while “b” stands for “before” Single point on curve P a Q a
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Own Price Elasticity of  Demand Own price  elasticity  of demand Percentage change in quantity  Percentage change in price = Arc Elasticity Approach
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Own Price Elasticity of  Demand Own price  elasticity  of demand Percentage change in quantity  Percentage change in price = where: P    = (P a  + P b ÷ 2;  Q   = (Q a  + Q b ÷ 2;  Q = (Q a  – Q b ); and  P = (P a  – P b ) Arc elasticity Own price  elasticity  of demand = [ Q ÷ ∆ P] x [P ÷  Q] The subscript “a” here again stands for “after” while “b” stands for “before” The “bar” over the P  and Q variables indicates  an average or mean.
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Own Price Elasticity of  Demand Own price  elasticity  of demand Percentage change in quantity  Percentage change in price = where: P    = (P a  + P b ÷ 2;  Q   = (Q a  + Q b ÷ 2;  Q = (Q a  – Q b ); and  P = (P a  – P b ) Arc elasticity Own price  elasticity  of demand = [ Q ÷ ∆ P] x  [P ÷ Q] The subscript “a” here again stands for “after” while “b” stands for “before” Specific range on curve P b P a Q b Q a
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Interpreting the Own Price  Elasticity of Demand If elasticity coefficient is: Demand is said to be: % in quantity is: Greater than 1.0 Elastic Greater than % in price Equal to 1.0 Unitary elastic Same as % in price Less than 1.0 Inelastic Less than % in price
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Demand Curves Come in a  Variety of Shapes Perfectly  inelastic Perfectly  elastic Inelastic Elastic
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