110Ch04

# 110Ch04 - Chapter 4 Elasticity Objectives Define calculate...

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Chapter 4: Elasticity – Objectives Define, calculate, and explain the factors that influence the price elasticity of demand Define, calculate, and explain the factors that influence the cross price elasticity of demand and the income elasticity of demand Define, calculate, and explain the factors that influence the elasticity of supply

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When Prices Tumble, Does Revenue Grow? The personal computer industry is operating in fiercely competitive conditions. The prices of notebook have fallen to less than \$1,000. The prices of desktops have fallen to less than \$500. How did the revenues of computer producers change? Might revenue still grow? The concept of elasticity helps to answer these questions.
Price Elasticity of Demand A change in supply brings a small increase in the quantity demanded and a large fall in price.

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Price Elasticity of Demand A change in supply brings a large increase in the quantity demanded and a small fall in price.
Price Elasticity of Demand The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same. Calculating Elasticity The price elasticity of demand is calculated by using the formula: Percentage change in quantity demanded Percentage change in price = Q / Q ave P / P ave

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Price Elasticity of Demand To calculate the price elasticity of demand: We express the change in price as a percentage of the average price— the average of the initial and new price, and we express the change in the quantity demanded as a percentage of the average quantity demanded— the average of the initial and new quantity.
Price Elasticity of Demand The price initially is \$20.50 and the quantity demanded is 9 pizzas/ hour. The price falls to \$19.50 and the quantity demanded increases to 11 pizzas/ hour. The price falls by \$1 and the quantity demanded increases by 2 pizzas/ hour. Average price is \$20 and

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Price Elasticity of Demand The percentage change in quantity demanded, % Q , is calculated as Q / Q ave , which is 2/10 = 1/5. The percentage change in price, % P , is calculated as P / P ave , which is \$1/\$20 = 1/20. The price elasticity of demand is (1/5)/(1/20) = 20/5 = 4.
By using the average price and average quantity , we get the same elasticity value regardless of whether the price rises or falls. The ratio of two proportionate changes is the same as the ratio of two percentage changes. The measure is units free because it is a ratio of two percentage changes and the percentages cancel out. Changing the units of measurement of price or

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110Ch04 - Chapter 4 Elasticity Objectives Define calculate...

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