Unit 3 Elasticity/Taxes
Chapter 6 Elasticity
I. Elasticity
a) Shows how sensitive quantity is to a change
in price.
1.
2.
3.
4.
Elasticity of Demand
Elasticity of Supply
Cross-Price Elasticity
Income Elasticity
II. Elasticity of Demand
a) Measure CONSUMERS responsiveness to a
change in price.
b) Who cares?
1. Used by firms to help determine prices and sales
2. Used by government to decide how to tax.
III. Inelastic Demand
a) Quantity if Insensitive to a change in price
1. Price Rises = quantity demanded falls very little.
2. Price Falls = quantity demanded increases very little.
b) People continue to buy no matter what
c) Inelastic demand curve is steep.
d) Examples
1. Gasoline
2. Milk
3. Diapers
IV. Inelastic Characteristics
a)
b)
c)
d)
e)
Few Substitutes
Necessities
Small portion of income
Required now rather than later
Elasticity coefficient less than 1.
Inelastic Demand
V. Elastic Demand
a) Quantity demanded is sensitive to a change
in price.
1. If price rises = quantity demanded falls a lot.
2. If price falls = quantity demanded rises a lot.
b) Amount people buy is sensitive to price.
c) Examples:
1. Soda
2. Boats
3. Beef
VI. Elastic Characteristics
a)
b)
c)
d)
e)
Many Substitutes
Luxuries
Large portion of income
Plenty of time to decide
Elasticity coefficient greater than 1
Elastic Demand
Elastic or Inelastic?
BeefGasolineReal EstateMedical CareElectricityGold-
Elastic- 1.27
INelastic - .20
Elastic- 1.60
INelastic - .31
INelastic - .13
Elastic - 2.6
Perfectly INELASTIC
(Coefficient = 0)
What about the
demand for insulin for
diabetics?
What if % change in
quantity demanded equals
% change in price?
Unit Elastic (Coefficient =1)
45 Degrees
VII. Total Revenue Test
a) Uses elasticity to show how changes in price will
affect total revenue (TR). (TR=Price x Quantity)
b) Elastic Demand
1. Price increase causes TR to decrease
2. Price decrease causes TR to increase
c) Inelastic Demand
1. Price increase causes TR to increase
2. Price decrease causes TR to decrease
d) Unit Elastic
1. Price changes and TR remains unchanged
VIII. Midpoint Method
a) Technique for calculating the percent change
for calculating elasticities.
IX. Price Elasticity of Supply
a) Show how sensitive PRODUCERS are to change in
price.
b) Mostly based on time limitations, producers need
time to produce more.
c) Inelastic: insensitive to a change in price (steep curve)
1. Most goods have inelastic supply in the short-run
d) Elastic: Sensitive to change in price (flat curve)
1. Most goods have elastic supply in the long-run
e) Perfectly inelastic: Q doesn’t change (vertical line)
1. Set Quantity
X. Cross-Price Elasticity of Demand
a) Shows how sensitive a product is to a change in price
of ANOTHER good
b) Shows if two goods are substitutes or complements
% change in quantity of product “b”
% change in price of product “a”
P increases 20%
Q decreases 15%
c) If coefficient is negative then goods are complements
d) If coefficient is positive then the goods are substitutes
XI. Income-Elasticity of Demand
a) Shows how sensitive a product is to a change in
INCOME
b) Shows if two goods are normal or inferior
% change in quantity
% change in income
Income increases 20%, and quantity decreases 15%
then the good is a…
c) If coefficient is negative then the good is inferior
d) If coefficient is positive then the good is normal.
An Elasticity Menagerie
An Elasticity Menagerie
1996 Micro FRQ #2
The Toledo arena holds a maximum of 40,000 people.
Each year the circus performs in front of a sold out crowd.
(a) Analyze the effect on each of the following of the
addition of a fantastic new death-defying trapeze act that
increases the demand for tickets.
(i)The price of tickets
(ii)The quantity of tickets sold
(b) The city of Toledo institutes an effective price ceiling on
tickets. Explain where the price ceiling would be set.
Explain the impact of the ceiling on each of the following.
(i) The quantity of tickets demanded
(ii) The quantity of tickets supplied
(c) Will everyone who attends the circus pay the ceiling
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price set by the city of Toledo. Why or why not?