1907 Ch02-2 Applications of Supply and Demand Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY Ch02-2 Applications of Supply and Demand
0 03-2 3.1 THE ELASTICITY OF DEMAND Price elasticity of demand 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 is the percentage change in quantity demanded given a percent change in the price. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-2 3.1 THE ELASTICITY OF DEMAND • Price elasticity of demand 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 is the percentage change in quantity demanded given a percent change in the price
190 03-3 ⑨ The Price Elasticity of Demand and Its Determinants Availability of Close Substitutes Necessities versus Luxuries Definition of the Market ·Time Horizon Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-3 The Price Elasticity of Demand and Its Determinants • Availability of Close Substitutes • Necessities versus Luxuries • Definition of the Market • Time Horizon
03-4 The Price Elasticity of Demand and Its Determinants Demand tends to be more elastic the larger the number of close substitutes if the good is a luxury. the more narrowly defined the market. the longer the time period. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-4 The Price Elasticity of Demand and Its Determinants • Demand tends to be more elastic : – the larger the number of close substitutes. – if the good is a luxury. – the more narrowly defined the market. – the longer the time period
1907 03-5 Computing the Price Elasticity of Demand The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price elasticity of demand= Percentage change in quantity demanded Percentage change in price Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-5 Computing the Price Elasticity of Demand • The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price elasticity of demand = Percentage change in quantity demanded Percentage change in price
190 03-6 Elastic Demand Shows Large-Quantity Response to Price Change P 200 140 120 P2 D.B 100 80 P 60 40 20 Q21 0 4080120160200240280320360 Quantity Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-6 Elastic Demand Shows Large-Quantity Response to Price Change
03-7 10 Nv的 The Midpoint Method:A Better Way to Calculate Percentage Changes and Elasticities 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-/[/2] (P2-P)/[(P2+P)/2] Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-7 The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities • 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 = ( ) /[( ) / ] ( ) /[( ) / ] QQ QQ PP PP 21 21 21 21 22
03-8 Point Elasticity of Demand Arc Elasticity of Demand Arc Elasticity of Demand Price elasticity of demand--/Q)/2] (P2-P)/[P2+P)/2] Point Elasticity of Demand ed lim- △0/g-- do P △P→0 △P/P dp Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-8 Point Elasticity of Demand & Arc Elasticity of Demand • Arc Elasticity of Demand • Point Elasticity of Demand Price elasticity of demand = ( ) /[( ) / ] ( ) /[( ) / ] QQ QQ PP PP 21 21 21 21 22 Q P dP dQ P P Q Q e P d · / / lim 0
03-9 10 ⑨ Interpreting Price Elasticity of Demand Values 1) Because of the inverse relationship between P and 0;Eis negative. 2)If E>1,the percent change in quantity is greater than the percent change in price.We say the demand is price elastic. 3)If E<1,the percent change in quantity is less than the percent change in price.We say the demand is price inelastic. 4)Unit Elastic E=1,Quantity demanded changes by the same percentage as the price. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-9 Interpreting Price Elasticity of Demand Values 1) Because of the inverse relationship between P and Q; EDis negative. 2) If ED > 1, the percent change in quantity is greater than the percent change in price. We say the demand is price elastic. 3) If ED < 1, the percent change in quantity is less than the percent change in price. We say the demand is price inelastic. 4) Unit Elastic ,ED = 1 ,Quantity demanded changes by the same percentage as the price
03-10 Price Elasticity of Demand Falls into Three Categories (a)Elastic Demand (b)Unit-Elastie Demand (e)Inelastie Demand 1.000 1.00 500 0.50 Q 1 2 1.0002.000 5101520 Quantity (millions) Quantity (millions) Quantity (millions) Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 03-10 Price Elasticity of Demand Falls into Three Categories
