Topic04 - Elasticity What do you think? Could reducing the...

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1 4. Elasticity Elasticity ± What do you think? ² Could reducing the supply of illegal drugs cause an increase in drug-related burglaries? ² How would reducing the supply of illegal drugs change total spending? The effect of extra border patrols on the market for illicit drugs Q(1000s of ounces/day) P($/ounce) 50 50 S D 80 40 S’ Total expenditure = P x Q S $250 = $50 x 50 S’ $320 = $80 x 40 Price elasticity of demand ± Elasticity ² A measure of the extent to which quantity demanded and quantity supplied respond to variations in price, income and other factors. ² An important determinant for various policy issues. Price elasticity of demand ± Defined ² Generally ³ A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good. ² Formally ³ The percentage change in the quantity demanded that results from a 1 per cent change in its price. Price elasticity of demand ± Measuring price elasticity of demand Price in Change Percentage Demanded Quantity in Change Percentage
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2 Price elasticity of demand ± Assume ² The price of pork falls by 2% and the quantity demanded increases by 6%. ³ Then the price elasticity of demand for pork is 3 2 6 = Price elasticity of demand ± Measuring price elasticity of demand Observations Price elasticity of demand will always be negative (i.e. an inverse relationship between price and quantity). For convenience we drop the negative sign. Price in Change Percentage Demanded Quantity in Change Percentage Price elasticity of demand ± Measuring price elasticity of demand When is > 1: elastic < 1: inelastic = 1: unit elastic Price in Change Percentage Demanded Quantity in Change Percentage Elastic and inelastic demand 3 Price elasticity of demand Inelastic Unit elastic Elastic 2 1 0 Price elasticity of demand ± What is the elasticity of demand for sushi? ² Originally ± Price = $2/piece ± Quantity demanded = 400 pieces/day ² New ± Price = $1.94/piece ± Quantity demanded = 404 pieces/day, then Inelastic : 3 1 Price in Change % Quantity in Change % = Price elasticity of demand ± What is the elasticity of season ski passes? ² Originally ± Price = $1000 ± Quantity demanded = 10 000 passes/year ² New ± Price = $950 ± Quantity demanded = 12 000 passes/year, then Elastic : 5 20 Price in Change % Quantity in Change % =
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3 Price elasticity of demand ± Determinants of price elasticity of demand ² Substitution possibilities ³ Elasticity of table salt and snake antivenom ² Budget share ³ Elasticity of bread and cars ² Time ³ Elasticity of electricity today and next year Price elasticity estimates for selected products Good or service Price elasticity Green peas 2.80 Restaurant meals 1.63 Automobiles 1.35 Electricity 1.20 Beer 1.19 Movies 0.87 Air travel (foreign) 0.77 Shoes 0.70 Coffee 0.25 Theatre, opera 0.18 Price elasticity of demand
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This note was uploaded on 08/29/2011 for the course ECON 1101 taught by Professor Janegoley during the Three '08 term at Australian National University.

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Topic04 - Elasticity What do you think? Could reducing the...

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