Outline1Elasticity defined2Price elasticity of supplyExample3Price elasticity of demandExample4Relationship between MR and price elasticity of demand5Other elasticities6Logarithmic scales and elasticitiesExample7Conclusion and summary
Objectives•Find and interpret the price elasticity of demand•Find and interpret the price elasticity of supply•Use logarithmic transformation/function to find elasticity•Find and interpret other important elasticities•Explain the relationship between TR, MR and the priceelasticity of demand
LiteratureRenshaw, ch. 9 & ch. 13
Elasticity defined•Shows how sensitive one variable is to changes in anothervariable.•In general,exy=%Δy%Δx, where%Δy=Δyy0×100,%Δx=Δxx0×100•Using differentiation:exy=dydx×xy=dy/ydx/x
The price elasticity of supply•Shows how sensitive quantity supplied is to changes in priceesp=dqsdp×pqs•Is positive; the larger, the more sensitive quantity supplied isto changes in price•esp>1 = price elastic supply•0<esp<1 = price inelastic supply•esp