Elasticity and Its application C Chapter 5
Elasticity and Its Application Chapter 5
Elasticity is a measure of how much buye nd ers an sellers respond to changes in market conditions allows us to analyze su apply and demand with greater precision
Elasticity… • … is a measure of how much buyers and sellers respond to changes in market conditions • … allows us to analyze supply and demand with greater precision
Price elasticity of Demand o Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price o It is a measure of how much the quantity demanded of a good responds to a change in the price of that good
Price Elasticity of Demand • Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. • It is a measure of how much the quantity demanded of a good responds to a change in the price of that good
Determinants of Price elasticity of demand Necessities versus luxuries Availability of close substitutes o Definition of the market Time horizon
Determinants of Price Elasticity of Demand • Necessities versus Luxuries • Availability of Close Substitutes • Definition of the Market • Time Horizon
Determinants of Price elasticity of demand Demand tends to be more elastic if the good is a luxury. o the longer the time perio the larger the number of close substitutes the more narrowly defined the market
Determinants of Price Elasticity of Demand Demand tends to be more elastic : • if the good is a luxury. • the longer the time period. • the larger the number of close substitutes. • the more narrowly defined the market
Computing the Price Elasticity of demand Percentage Change Price Elasticity of Demand= In Quantity Demanded Percentage Change in Price Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as (10-8) ×100 20 percent (2.20-2.00) ×100 10 percent 2.00
Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as: Price Elasticity of Demand = Percentage Change in Quantity Demanded Percentage Change in Price Price Elasticity of Demand = Percentage Change in Quantity Demanded Percentage Change in Price 2 10 percent 20 percent 100 2 00 2 20 2 00 100 10 10 8 = = − − . ( . . ) ( )
Computing the price elasticity of Demand using the midpoint formula The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change Price Elasticity of Demand (Q2-Q1)(Q2+Q1)2 (P2-P1)[(P2+P1)2
Computing the Price Elasticity of Demand Using the Midpoint Formula • The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change. (P P )/[(P P )/2] (Q Q )/[(Q Q )/2] Price Elasticity of Demand = 2 1 2 1 2 1 2 1 − + − +
Computing the Price Elasticity of Demand using the midpoint formula Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as: (10-8) 10+8)/2 22 percent 2.32 (2.20-2.00)9.5 percent (2.00+220)/2
Computing the Price Elasticity of Demand Using the Midpoint Formula • Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as: 2.32 9.5 22 (2.00 2.20)/ 2 (2.20 2.00) (10 8)/ 2 (10 8) = = + − + − percent percent
Ranges of Elasticity Inelastic demand Price elasticity of demand is less than one ● Elastic demand Price elasticity of demand is greater than one Perfect inelastic Quantity demanded does not respond to price changes Perfect elastic Quantity demanded changes infinitely with any change in price Unit elastic Quantity demanded changes by the same percentage as the price
Ranges of Elasticity • Inelastic Demand – Price elasticity of demand is less than one • Elastic Demand – Price elasticity of demand is greater than one • Perfect Inelastic – Quantity demanded does not respond to price changes • Perfect Elastic – Quantity demanded changes infinitely with any change in price. • Unit Elastic – Quantity demanded changes by the same percentage as the price
Perfectly Inelastic Demand Elasticity equals o Price Demand 1An$5|… Increase In price…4r…… 100 Quantity 2.leaves the quantity demanded unchanged
Perfectly Inelastic Demand - Elasticity equals 0 Quantity Price 4 $5 Demand 100 2. ...leaves the quantity demanded unchanged. 1. An increase in price
