[Chapter Seven]
Describing Supply and Demand: Elasticities
Learning Objectives
After reading the material in this chapter, you will be able to do the following:
1.
Use the terms
price elasticity of supply
and
price elasticity of demand
to describe
the responsiveness of quantities to changes in price.
2.
Calculate elasticity graphically and numerically.
3.
Distinguish five elasticity terms that are used to differentiate varying degrees of
responsiveness.
4.
Explain the importance of substitution in determining elasticity of supply and
demand.
5.
Relate price elasticity of demand to total revenue.
6.
State how other elasticity concepts are useful in describing the effect of shift
factors on demand.
7.
Explain how the concept of elasticity makes supply and demand analysis more
useful.
Chapter Outline
Describing Supply and Demand: Elasticities
•
Example: Jet Blue was hoping that quantity of air
travel demanded was highly responsive to price, so it set its prices much
lower than its competitors.
Price Elasticity
•
Price Elasticity of Demand,
E
D
: “the percentage
change in quantity demanded divided by the percentage change in
price.”
•
Price Elasticity of Supply,
E
S
: “the percentage
change in quantity supplied divided by the percentage change in price.”
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•
Economists talk about the elasticity of demand as a
positive number (or as the absolute value), because it is always
negative.
•
A larger number for price elasticity of demand
means quantity demanded is more responsive to price.
•
What Information Price Elasticity Provides
•
Numerical examples: A price elasticity of 0.3 means a 10% rise in price
will lead to a 3% decrease in quantity demanded; a price elasticity of 5
means a 10% rise in price will lead to a 50% decrease in quantity
demanded.
•
Classifying Demand and Supply as Elastic or Inelastic
•
Elastic: when “the percentage change in quantity is greater than the
percentage change in price
(E
> 1).”
•
Inelastic: when “the percentage change in quantity is less than the
percentage change in price (
E
< 1).”
•
Examples: supply of land is inelastic; supply of pencils is elastic;
demand for Parker ballpoint pens is elastic (because PaperMates are a
close substitute); demand for table salt (which lacks a close substitute)
is inelastic.
•
Elasticity Is Independent of Units
•
Elasticity measures percentage changes in variables, making
comparisons among different goods easier. Example: a $1 change in the
price of a $1,000 computer decreases quantity demanded from 10 to 9,
and a $1 increase in the price of a pen from $1 to $2 decreases quantity
demanded from 10,000 to 9,999. Measured in units these situations look
similar, but demand for computers in this case is elastic, and demand
for pens is inelastic.
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 Fall '11
 Smith
 Price Elasticity, Supply And Demand, demand curves

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