Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Chapter 6. Elasticity: The Responsiveness of
Demand and Supply
Instructor: JINKOOK LEE
Department of Economics / Texas A&M University
ECON 202 504
Principles of Microeconomics
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Elasticity
Demand curve: the relationship between the price of a good and the
quantity demanded.
Beyond the law of demand, we want to know how much the quantity
demanded change as a result of a price increase or decrease.
Economists use the concept of elasticity to measure it.
Elasticity: A measure of how much one economic variable responds to
changes in another economic variable.
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Price Elasticity of Demand
Price elasticity of demand: The responsiveness of the quantity demanded
to a change in price
Price elasticity of demand =
% change in quantity demanded
% change in price
(1)
price elasticity of demand is not the same as the slope of the demand
curve.
the measurement of slope is sensitive to the units chosen for quantity
and price.
price elasticity of demand is always negative.
but we drop ‘-’ sign and compare their absolute values.
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Elastic/Inelastic Demand
Elastic
Price elasticity > 1
Inelastic
Price elasticity < 1
Price Elasticity of Supply
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Elastic/Inelastic Demand
Unit-elastic
Price elasticity = 1
Perfectly elastic
Price elasticity = ∞
Price Elasticity of Supply
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Elastic/Inelastic Demand
Perfectly inelastic
Price elasticity = 0
Price Elasticity of Supply
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Midpoint Formula
It is possible to have different values for the price elasticity of demand between the
same two points on the same demand curve.
To ensure that we have only one value of the price elasticity of demand, we use
the midpoint formula.
Elasticity by Midpoint Formula
(Q2 −Q1 )
Q +Q
( 12 2 )
÷
(P2 −P1 )
P +P
( 12 2 )
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Determinants of Price Elasticity of Demand
Why do price elasticities differ among products?
(1)Availability of Close Substitutes
In general, if a product has more substitutes available, it will have more
elastic demand.
If a product has fewer substitutes available, it will have less elastic
demand.
(2)Luxuries versus Necessities
The demand curve for a luxury is more elastic than the demand curve
for a necessity.
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Determinants of Price Elasticity of Demand
Why do price elasticities differ among products?
(3)Passage of Time
It usually takes consumers some time to adjust their buying habits
when prices change.
The more time that passes, the more elastic the demand for a product
becomes.
(4)Definition of the Market
The more narrowly we define a market, the more elastic demand will be.
(5)Share of a Good in a Consumer’s Budget
the demand for a good will be more elastic the larger the share of the
good in the average consumer’s budget.
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Elasticity and Total Revenue
Total revenue: price per unit × number of units sold.
When demand is elastic (inelastic), a cut in price will increase (decrease)
total revenue.
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Demand, Total Revenue, Marginal Revenue
Q1. Draw demand curve, total revenue curve, and marginal revenue curve.
Q2. Describe the relationship between price elasticity of demand and total revenue.
Q3. Describe the relationship between marginal revenue and total revenue.
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Cross-Price Elasticity of Demand
Cross-price elasticity of demand (C-PE) measures the effect of an
increase in the price of one good on the quantity of another good
demanded.
The C-PE can is positive or negative, depending on whether the two
products are substitutes or complements.
Cross − price elasticity of demand =
% change in quantity demanded of one good
(2)
% change in price of another good
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Income Elasticity of Demand
Income elasticity of demand (IE) measures the responsiveness of quantity
demanded to changes in income.
Income elasticity of demand =
Income elasticity > 0 : Normal good.
1 < IE : luxury good.
0 < IE < 1 : necessity good.
Income elasticity < 0 : Inferior good.
% change in quantity demanded
% change in income
(3)
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Application: Elasticity and the Disappearing Family Farm
We can use price elasticity and income elasticity to analyze economic issues.
over the past 60 years, supply
curve for wheat has moved to the
right largely.
income elasticity of demand for
wheat was low, so demand for
wheat increased relatively little.
price elasticity of demand is also
low, so demand curve is steep
relatively.
The large shift in the supply curve and the small shift in the demand
curve resulted in a sharp decline in the price of wheat.
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Price Elasticity of Supply
Price Elasticity of Supply: The responsiveness of the quantity supplied to
a change in price.
Price elasticity of supply =
% change in quantity supplied
% change in price
the price elasticity of supply will be a positive number.
elastic (>1), inelastic (<1), unit-elastic(=1).
perfectly elastic (= ∞), perfectly inelastic (= 0)
(4)
Price Elasticity of Demand
Elasticity and Total Revenue
Other Demand Elasticities
Price Elasticity of Supply
Application: Changes in Price Depend on the Price Elasticity of Supply
DemandTypical and DemandJuly 4 represent the typical demand for parking spaces and
demand on the Fourth of July.
in figure (a), supply is inelastic, shifting from A to B results in a large increase in
price and a small increase in the quantity supplied.
in figure (b), supply is elastic, shifting from A B results in a smaller increase in price
and a larger increase in the quantity supplied.