e lasticity economics 101. elasticity 彈性 … is a measure of how much buyers and sellers respond...
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ELASTICITYEconomics 101
ELASTICITY彈性 … is a measure of how much buyers and
sellers respond to changes in market conditions
THE ELASTICITY OF DEMAND需求彈性 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.
DETERMINANTS OF PRICE ELASTICITY OF DEMAND Availability of Close Substitutes: More close substitutes=More elastic Example: Butter vs Egg
Necessities versus Luxuries: inelastic versus elastic Example: visit a doctor vs sailboat
DETERMINANTS OF PRICE ELASTICITY OF DEMAND Definition of the Market: Narrowly defined market– more elastic Broadly defined market – less elastic Example: Food vs Ice Cream
Time Horizon Longer time horizon– more elastic Shorter time horizon– less elastic
SUMMARY
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.
The (own) price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.
P rice e las tic ity o f d em an d =P ercen tag e ch an g e in q u an tity d em an d ed
P ercen tag e ch an g e in p rice
CALCULATING ELASTICITY
1.1
1.0
1.44 1.5
CALCULATING ELASTICITY: POINT ELASTICITY點彈性Point
Elasticity={[Q2-Q1]/Q1}/{[P2-P1]/P1}
Case 1: Price rises from 1 to 1.1
% change in qty = (1.44-1.5)/1.5= -4%% change in price = (1.10-1)/1= 10%Elasticity=-4%/10%=-0.4
CALCULATING ELASTICITY: POINT APPROACH
Case 2: Price falls from 1.1 to 1.
% change in qty = (1.5-1.44)/1.44= 4.16%% change in price = (1-1.10)/1.10= -9.09%Elasticity=4.16%/-9.09%=-0.457
POTENTIAL PROBLEM OF POINT ELASTICITY (Point) Elasticity level in case 1 is different
from (point) elasticity level in case 2
MIDPOINT METHOD (ARC ELASTICITY弧彈性 )
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.
MIDPOINT METHOD FORMULA
P rice e las tic ity o f d em an d =( ) / [( ) / ]
( ) / [( ) / ]
Q Q Q QP P P P2 1 2 1
2 1 2 1
2
2
ARC ELASTICITY(MIDPOINT METHOD)Case 1: Price rises from 1 to 1.1. % change in qty = (1.44-1.5)/1.47 = -4.1% % change in price = (1.10-1)/1.05 = 9.5% Elasticity=-4.1%/9.5% =-0.432Case 2: Price falls from 1.1 to 1. % change in qty = (1.5-1.44)/1.47 = 4.1% % change in price = (1-1.10)/1.05 = -9.5% Elasticity=4.1%/-9.5% =-0.432
ELASTIC 具彈性 OR INELASTIC不具彈性 ? 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 in price.
Price elasticity of demand is greater than one.
OTHER TYPES Perfectly Inelastic完全不具彈性
Quantity demanded does not respond to price changes.
Perfectly Elastic完全具彈性 Quantity demanded changes infinitely with any
change in price. Unit Elastic單位彈性
Quantity demanded changes by the same percentage as the price.
SUMMARY
|E|=0, perfectly inelastic 0<|E|<1, inelastic |E|=1, unit elastic |E|>1, elastic |E|=infinity, perfectly elastic
Product Market ElasticityAutomobilesChevette U.S. -3.2Civic U.S. -4Consumer productsmusic CDs Aus -1.83cigarettes U.S. -0.3liquor U.S. -0.2football games U.S. -0.275Utilitieselectricity (residential) Quebec -0.7telephone service Spain -0.1water (residential) U.S. -0.25water (industrial) U.S. -0.85
OWN-PRICE ELASTICITIES
SLOPE AND ELASTICITY
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.
Higher slope, lower elasticity
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(a) Perfectly Inelastic Demand: Elasticity Equals 0
$5
4
Quantity
Demand
1000
1. Anincreasein price . . .
2. . . . leaves the quantity demanded unchanged.
Price
(b) Inelastic Demand: Elasticity Is Less Than 1
Quantity0
$5
90
Demand1. A 22%increasein price . . .
Price
2. . . . leads to an 11% decrease in quantity demanded.
4
100
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2. . . . leads to a 22% decrease in quantity demanded.
(c) Unit Elastic Demand: Elasticity Equals 1
Quantity
4
1000
Price
$5
80
1. A 22%increasein price . . .
Demand
(d) Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
1000
Price
$5
50
1. A 22%increasein price . . .
2. . . . leads to a 67% decrease in quantity demanded.
(e) Perfectly Elastic Demand: Elasticity Equals Infinity
Quantity0
Price
$4 Demand
2. At exactly $4,consumers willbuy any quantity.
1. At any priceabove $4, quantitydemanded is zero.
3. At a price below $4,quantity demanded is infinite.
LINEAR DEMAND CURVE
Vertical intercept: perfectly elastic Upper segment: elastic Middle: Unit elastic Lower segment: inelastic Horizontal intercept: perfectly inelastic
TOTAL REVENUE AND ELASTICITY
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
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Demand
Quantity
Q
P
0
Price
P × Q = $400(revenue)
$4
100
TOTAL REVENUE AND ELASTICITY
With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.
With an inelastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately smaller. Thus, total revenue increases.
INCOME 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.
NORMAL OR INFERIOR?
Types of Goods Normal Goods Inferior Goods
Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.
Normal goods: Positive income elasticity Inferior goods: Negative income elasticity
NECESSITY OR LUXURY? Goods consumers regard as necessities tend
to be income inelastic Examples include food, fuel, clothing, utilities,
and medical services. Goods consumers regard as luxuries tend to
be income elastic. Examples include sports cars, furs, and
expensive foods.
INCOME ELASTICITY
I >0, Normal good I <0, Inferior good Among normal goods: 0<I<1, necessity I>1, luxury
Item Market ElasticityConsumer productscigarettes U.S. 0.1liquor U.S. 0.2food U.S. 0.8clothing U.S. 1newspapers U.S. 0.9Utilitieselectricity (residential) Quebec 0.1telephone service Spain 0.5
INCOME ELASTICITY
PRICE ELASTICITY OF SUPPLY
Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.
FORMULA
The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.
P rice e las tic ity o f su p p ly =
P ercen tag e ch an g e in q u an tity su p p lied
P ercen tag e ch an g e in p rice
SUMMARY
S=0, perfectly inelastic 0<S<1, inelastic S=1, unit elastic S>1, elastic S=infinity, perfectly elastic
SLOPE AND ELASTICITY
Because the price elasticity of supply measures how much quantity supplied responds to the price, it is closely related to the slope of the supply curve.
Higher slope, lower elasticity
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(a) Perfectly Inelastic Supply: Elasticity Equals 0
$5
4
Supply
Quantity1000
1. Anincreasein price . . .
2. . . . leaves the quantity supplied unchanged.
Price
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(b) Inelastic Supply: Elasticity Is Less Than 1
110
$5
100
4
Quantity0
1. A 22%increasein price . . .
Price
2. . . . leads to a 10% increase in quantity supplied.
Supply
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(c) Unit Elastic Supply: Elasticity Equals 1
125
$5
100
4
Quantity0
Price
2. . . . leads to a 22% increase in quantity supplied.
1. A 22%increasein price . . .
Supply
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(d) Elastic Supply: Elasticity Is Greater Than 1
Quantity0
Price
1. A 22%increasein price . . .
2. . . . leads to a 67% increase in quantity supplied.
4
100
$5
200
Supply
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(e) Perfectly Elastic Supply: Elasticity Equals Infinity
Quantity0
Price
$4 Supply
3. At a price below $4,quantity supplied is zero.
2. At exactly $4,producers willsupply any quantity.
1. At any priceabove $4, quantitysupplied is infinite.
DETERMINANTS OF PRICE 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.
Item Horizon Price Elasticitydistillate short run 1.57gasoline short run 1.61pork long run 0.23tobacco long run 7housing long run 1.6 - 3.7
PRICE ELASTICITIES OF SUPPLY
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 a new wheat hybrid that is more productive than existing varieties?
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Quantity ofWheat
0
Price ofWheat
3. . . . and a proportionately smallerincrease in quantity sold. As a result,revenue falls from $300 to $220.
Demand
S1 S2
2. . . . leadsto a large fallin price . . .
1. When demand is inelastic,an increase in supply . . .
2
110
$3
100
OTHER APPLICATIONS
A reduction in supply in the world market for oil: the response depends on the time horizon.
Policies to Reduce the Use of Illegal Drugs: Drug interdiction Drug education
QUIZ 1
Beachfront resorts: inelastic supply Automobile: elastic supply Suppose a rise in population doubles the
demand for both products. Price? Quantity? Consumer spending?
QUIZ 2
Why? Why? A drought around the world: Total revenue that farmers received from
sale of grain rises. However, a drought in Kansas reduces total revenue that Kansas farmers receive.