Lecture 4 Elasticity

# Lecture 4 Elasticity - (d Straight-line demand curve D 1 2...

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Elasticity As A General Concept • Elasticity can be used to measure the responsiveness of anything to anything else in percentage terms. • Income elasticity of demand = % Δ quantity demanded ÷ % Δ income • Calculate the income elasticities of the table

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Type of good Total expen- diture Share Total expen- diture Share Income Elasticit y Generi c Good 100 0.2 80 0.08 Salt 10 0.02 10 0.01 Food 180 0.36 300 0.30 Movies 90 0.18 180 0.18 Educati on 120 0.24 430 0.43 Total Income 500 1.00 1000 1.00
Elasticity: The Measure of • Price elasticity of demand = % Δ quantity of demand ÷ % Δ price • Elastic demand : E D > 1 • Inelastic demand : E D < 1

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Measuring Price Elasticity at a Point P max P o Q o A O Example:
DEMAND CURVES WITH DIFFERENT ELASTICITIES 0 90 D D Price (a) Perfectly inelastic demand curve 0 Quantity Demanded (b) Perfectly elastic demand curve D D \$0.75 D 0 (c)

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Unformatted text preview: (d) Straight-line demand curve D 1 2 45 7 3 4 \$6 B' A' C' A B C 20 10 \$30 D D 7 14 U' U T S Unit- elastic demand curve UNIT-ELASTIC DEMAND CURVE Price Quantity Demanded 20 10 \$30 D D 7 14 U' U T S Change in Elasticity |E D |=1 |E D |>1 |E D |<1 Q P P max P max 2 Implications of Price Elasticity 1. Relationship Between E D and Total Revenue 2. Relationship Between E D and Excise Tax 3. Monopoly Power 4. Laffer Curve 5. Devaluation 6. Discussion and Numerical Examples Price Elasticity and Total Revenue • ↑ price ⇒ ↓ revenues if the demand curve is elastic • ↑ price ⇒ ↑ revenues if the demand curve is inelastic • ↑ price ⇒ Δ revenues stay the same if the demand curve is unit elastic...
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Lecture 4 Elasticity - (d Straight-line demand curve D 1 2...

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