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Week 3 Lecture - ECON1001 Week 3 Elasticity Topic Outline...

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ECON1001 Week 3 Elasticity
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2 Topic Outline Define and calculate the price elasticity of demand Explain whether a price change increases or decreases revenue Determinants of the price elasticity of demand Define and calculate income and cross- price elasticities of demand Define and calculate the price elasticity of supply
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3 Elasticity Elasticity is a measure of how sensitive an economic variable is to another economic variable There are as many elasticities as pairs of economic variables Start by considering the price elasticity of demand
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4 Elasticity of Demand Price elasticity of demand A measure of the responsiveness of the quantity demanded of a good to a change in its price (ceteris paribus). The percentage change in quantity demanded in response to a one percentage change in the market price.
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5 Elasticity of Demand Suppose you are the manager of bus services There are empty seats in the buses (excess capacity). The manager decides the price of a bus ride. This price is not determined by the market (it happens sometimes). You wish to raise revenue (P*Q).
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6 Elasticity of Demand You face a trade-off If you raise the price, the number of trips demanded will fall. What is the impact on total revenue? It depends on the elasticity of demand.
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7 Revenue gain Revenue loss Quantity (millions of trips per year) Price (dollars per trip) 1.00 1.20 D a 9.5 10 Demand and Total Revenue
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8 Revenue loss Revenue gain Quantity (millions of trips per year) Price (dollars per trip) 1.00 1.20 D b 8 10 Demand and Total Revenue
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9 Slope Depends on Units of Measurement In these two examples, we can compare the slopes of the demand curves. With the steeper slope revenue increases when increasing the price. The other way around with the flatter slope. Why is the slope not good enough? We cannot do so if we want to compare different goods and services (caviar and potatoes). Elasticity is independent of the units of measurement.
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10 Importance of the Price Elasticity of Demand Remember comparative statics? Using the price elasticity of demand we can evaluate the effect on price and quantity of a change in supply. Not only the direction of the effects, but also the amount… and its effect in revenue.
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11 S new Importance of Price Elasticity of Demand ...
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