1、,Elasticity and Its Application,Chapter 5,Copyright 2004 by South-Western,a division of Thomson Learning.,Chapter 5 Elasticity and its application,Learn the meaning of the elasticity of demand Examine what determines the elasticity of demand Learn the meaning of the elasticity of supply examine what
2、 determines the elasticity of supply,Apply the concept of elasticity in three very elasticity different market,Key concept,Elasticity Price elasticity of demand Total revenue Income elasticity of demand Cross-price elasticity of demand Price elasticity of supply,Elasticity . . ., is a measure of how
3、 much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater precision.,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 qua
4、ntity 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 Definition of the Market Time Horizon,Determinants of Price Elasticity of Demand,Demand tends to be more elastic : if the
5、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,The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in pr
6、ice.,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:,Computing the Price Elasticity of Demand Using the Midpoint Formula,The midpoi
7、nt formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.,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
8、to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as:,Ranges of Elasticity,Inelastic Demand Quantity demanded does not respond strongly to price changes. Price elasticity of demand is less than one. Elastic Demand Quantity demanded responds strongly to changes
9、 in price. Price elasticity of demand is greater than one.,Computing the Price Elasticity of Demand,Demand is price elastic,$5,4,Demand,Quantity,100,0,Price,50,Ranges of Elasticity,Perfectly Inelastic Quantity demanded does not respond to price changes. Perfectly Elastic Quantity demanded changes in
10、finitely with any change in price. Unit Elastic Quantity demanded changes by the same percentage as the price.,A Variety of Demand Curves,Because the price elasticity of demand measures how much quantity demanded responds to the price, it is closely related to the slope of the demand curve.,Perfectl
11、y Inelastic Demand - Elasticity equals 0,Quantity,Price,2. .leaves the quantity demanded unchanged.,Inelastic Demand - Elasticity is less than 1,Quantity,Price,Unit Elastic Demand - Elasticity equals 1,Quantity,Price,Elastic Demand - Elasticity is greater than 1,Quantity,Price,Perfectly Elastic Dema
12、nd - Elasticity equals infinity,Quantity,Price,Elasticity and Total Revenue,Total revenue is the amount paid by buyers and received by sellers of a good. Computed as the price of the good times the quantity sold. TR = P x Q,$4,Demand,Quantity,P,0,Price,P x Q = $400,(total revenue),100,Elasticity and
13、 Total Revenue,Elasticity and Total Revenue,With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases. (如果需求是单位弹性，当价格变动时，总收益不变）,Elasticity and Total Revenue: Inelastic Demand,$3,Quantity,0,Price,80,Revenue = $2
14、40,Demand,$1,Demand,Quantity,0,Revenue = $100,100,Price,An increase in price from $1 to $3.,leads to an increase in total revenue from$100 to $240,Elasticity and Total Revenue,With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larg
15、er. Thus, total revenue decreases.,Elasticity and Total Revenue: Elastic Demand,Demand,Quantity,0,Price,$4,50,Demand,Quantity,0,Price,Revenue = $100,$5,20,An increase in price from $4 to $5.,leads to a decrease in total revenue from$200 to $100,Computing the Elasticity of a Linear Demand Curve,Incom
16、e Elasticity of Demand,Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income.,Computing Income Elasticity,Income Elasticity -
17、Types of Goods -,Normal Goods Inferior Goods Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.,Income Elasticity - Types of Goods -,Goods consumers regard as necessities tend to be income inelastic Examples include food, fuel, clothing,
18、utilities, and medical services. Goods consumers regard as luxuries tend to be income elastic. Examples include sports cars, furs, and expensive foods.,Price Elasticity of Supply,Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price. It is
19、a measure of how much the quantity supplied of a good responds to a change in the price of that good.,Ranges of Elasticity,Perfectly Elastic ES = Relatively Elastic ES 1 Unit Elastic ES = 1,Ranges of Elasticity,Relatively Inelastic ES 1 Perfectly Inelastic ES = 0,Perfectly Inelastic Supply - Elastic
20、ity equals 0,Quantity,Price,2. .leaves the quantity supplied unchanged.,Inelastic Supply - Elasticity is less than 1,Quantity,Price,Unit Elastic Supply - Elasticity equals 1,Quantity,Price,Elastic Supply - Elasticity is greater than 1,Quantity,Price,Perfectly Elastic Supply - Elasticity equals infin
21、ity,Quantity,Price,Determinants of Elasticity of Supply,Ability of sellers to change the amount of the good they produce. Beach-front land is inelastic. Books, cars, or manufactured goods are elastic. Time period. Supply is more elastic in the long run.,Computing the Price Elasticity of Supply,The p
22、rice elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.,Application of Elasticity,Can good news for farming be bad news for farmers? What happens to wheat farmers and the market for wheat when university agronomists discover
23、a new wheat hybrid that is more productive than existing varieties?,Application of Elasticity,Examine whether the supply or demand curve shifts. Determine the direction of the shift of the curve. Use the supply-and-demand diagram to see how the market equilibrium changes.,An Increase in Supply in th
24、e Market for Wheat,$3,Quantity of Wheat,100,0,Price of Wheat,Demand,S1,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,3. .and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220.,An Increase in Supply in the Market for Wheat,$3,Q
25、uantity of Wheat,100,0,Price of Wheat,1. When demand is inelastic, an increase in supply.,Demand,S1,S2,2,110,2. .leads to a large fall in price.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Compute Elasticity,Compute Elasticity,Demand is inelastic,Summary,Price elasticity
26、of demand measures how much the quantity demanded responds to changes in the price. If a demand curve is elastic, total revenue falls when the price rises. If it is inelastic, total revenue rises as the price rises.,Summary,The price elasticity of supply measures how much the quantity supplied respo
27、nds to changes in the price. In most markets, supply is more elastic in the long run than in the short run.,Computing the Price Elasticity of Demand,Perfectly Inelastic Demand - Elasticity equals 0,Inelastic Demand - Elasticity is less than 1,Unit Elastic Demand - Elasticity equals 1,Elastic Demand
28、- Elasticity is greater than 1,Perfectly Elastic Demand - Elasticity equals infinity,Elasticity and Total Revenue,Elasticity and Total Revenue: Inelastic Demand,Elasticity and Total Revenue: Elastic Demand,Perfectly Inelastic Supply - Elasticity equals 0,Inelastic Supply - Elasticity is less than 1,
29、Unit Elastic Supply - Elasticity equals 1,Elastic Supply - Elasticity is greater than 1,Perfectly Elastic Supply - Elasticity equals infinity,An Increase in Supply in the Market for Wheat,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,An Increase in Supply in the Market for Wheat,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,结束,
