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**Unformatted text preview: **1 Stephen Chiu University of Hong Kong Elasticity 2 Example 4.1 The Western tunnel, which has low travel, is now charging $50 per car. Should it reduce the toll to $40, say? 1. Its travel will increase. 2. But the toll per car is lower. The net impact on its revenue depends on the responsiveness of quantity demanded to the price reduction. 3 Price Elasticity of Demand The Price Elasticity of Demand is a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good. Formally, it is the percentage change in the quantity demanded that results from a 1 percent change in its price. Percentage change in quantity demanded Percentage change in price 4 Elasticity Generally, price elasticity is a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good 5 Example 4.2 The price of pork falls by 2% and the quantity demanded increases by 6% Then the price elasticity of demand for pork is Percentage change in quantity demanded Percentage change in price 6%-2% =- 3 6 Example 4.3. If a 1 percent rise in the price of shelter caused a 2 percent reduction in the quantity of shelter demanded, the price elasticity of demand for shelter would be -2% 1% =- 2 7 Price Elasticity of Demand Measuring Price Elasticity of Demand Observations Price elasticity of demand is always negative (i.e., an inverse relationship between price and quantity). For convenience sometimes we drop the negative sign. Percentage change in quantity demanded Percentage change in price 8 Price Elasticity of Demand Price elasticity of demand Elastic Unit elastic inelastic-1-2-3 Price in Change Percentage Demanded Quantity in Change Percentage 9 Example 4.4. What is the elasticity of demand for sushi? Originally Price = $10/piece Quantity demanded = 400 pieces/day New Price = $9.7/piece Quantity demanded = 404 pieces/day, then Inelastic! (404 - 400)/400 (9.7 - 10)/10 = 1%-3% =- 1 3 10 Example 4.5. What is the elasticity of Hong Kong Disney passes? Originally Price = $1600 Quantity demanded = 10,000 passes/year New Price = $1520 Quantity demanded = 12,000 passes/year, then Elastic!...

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