rohlf_lecture6

# rohlf_lecture6 - Elasticity and other applications of...

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1 Elasticity and other applications of Supply and Demand An important concept in evaluating demand and supply is “elasticity” Generally, given two variables X and Y, the elasticity is % change in X / % change in Y Different types of elasticities Price elasticity % change in Q / % change in price Income elasticity % change in Q / % change in income

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2 Coefficient of elasticity  =   D Q Q D P P = Percentage change in quantity demanded Percentage change in price Price elasticity of demand (coefficient of demand elasticity)
3 Coefficient of elasticity  =   - 100 1000 \$.50 \$2.50 = - 10% 20% = - .5 Example Suppose increase in price of six-pack of coke from \$2.50 to \$3 Leads to a decrease in quantity purchased from 1000 to 900

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4 D Q / [( Q 1 + Q 2 ) / 2] D P / [ P 1 + P 2 ) / 2] = 100/ (1900/ 2) \$.50 / (\$5.50/ 2) = 100/ 950 \$.50 / \$2.75 = 10.5% 18.2% = .58 Arc elasticity Note that computation of elasticity depends on whether you use beginning or ending as reference point Sometimes we use “arc elasticity”, computing % change using average of starting and ending values
5 Elasticity Value We categorize the elasticity value into 3 types: (absolute value of) elasticity > 1: elastic (absolute value of) elasticity = 1: unit elastic (absolute value of) elasticity < 1: inelastic

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