chap 5 - Elasticity - Elasticity and its Application...

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Elasticity and its Application Chapter 5
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Contents Elasticity of demand Various concepts of elasticity How to calculate? Supply elasticity Cross price elasticity Income elasticity
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What is the difference between these 2 diagrams? Demand Demand P 1 P 2 P 1 P 2 Q 1 Q 2 Q 1 Q 2 What is the reason for this difference?
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Types of Elasticity of Demand Elasticity of Demand Price Elasticity Income Elasticity Cross Price Elasticity
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What is elasticity of demand? This measures the responsiveness of quantity demanded to a change in one of the determinants of demand (assuming other determinants remain constant)
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Price Elasticity of Demand This measures the responsiveness of quantity demanded to a change in price of a product % change in quantity demanded % change in own price ΔQ P 2 + P 1 ΔP Q 2 + Q 1 E d = x E d =
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The midpoint method The midpoint formula is preferable when calculating the price elasticity of demand. This calculates the average elasticity between 2 points. Two points: (Q 1 , P 1 ) and (Q 2 , P 2 ) ∆Q (P 2 + P 1 ) Ed = x ∆P (Q 2 + Q 1 ) / [( P 2  +  P 1 )/2] / [( Q 2  +  Q 1 )/2] Price elasticity of demand =
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Price Elasticity of Demand – Example Week 1: Price = $4.00 Sales 8,100Kg Week 2: Price = $4.50 Sales 6,900Kg E d = -1,200 x 4.50 + 4.00 .
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