Percentage Change Demand increases from 80 to 100. % increase = 100 - 80 80 = 0.25 = 25% Demand...

Percentage Change

Demand increases from 80 to 100.

% increase =100 - 80

80= 0.25 = 25%

Demand decreases from 100 to 80.

% decrease =100 - 80

100= 0.20 = 20%

5 Elasticity

Price Elasticity of Demand

5 10 15 20 25 30 35

0.2

0.4

0.6

0.8

1.0

1.2

Pounds of Coffee (M)

Pri

ce p

er

pou

nd (

$)

% increase in price

% decrease in quantity

Price elasticityof demand

% change in quantity demanded

% change in price=

Elastic (elasticity>1.0) very responsive

“a measure of responsiveness”

Inelastic (elasticity<1.0) not very responsive

5 10 15 20 25 30 35

0.2

0.4

0.6

0.8

1.0

1.2

Pounds of Coffee (M)

Pri

ce p

er

pou

nd (

$)

Perfectly inelastic

price has no effect

Perfectly elasticonly one price will do

Determinants of Price Elasticity

Using the Price Elasticity of Demand

Price elasticityof demand

% change in quantity demanded

% change in price=

% change inquantity

Price elasticityof demand

% change in price= X

What impact increasing egg prices from $1.20 to $1.35?

= X

Changes in Total Revenue

If 50,000 dozen eggs are sold at $1.20, what impact on revenue of increasing price to

$1.35?

Decrease in eggs sold = 50,000 x 1.25% = 625

Old revenue = 50,000 x $1.20 = $60,000

New revenue = 49,375 x $1.35 = $66,656

Elastic price increase will decrease revenue

Inelastic price increase will increase revenue

Other Elasticities of Demand

Income elasticityof demand

% change in quantity demanded

% change in income=

Cross elasticityof demand

% change in X demanded

% change in price of Y=

Substitutes cross elasticity is positive

Complements price elasticity is negative

Price Elasticity of Supply

Price elasticityof supply

% change in quantity supplied

% change in price=

Determinants of Price Elasticity of Supply

Who Bears the Burden?

Quantity

Pri

ce

100 200 300 400 500

5

10

15

20

25

30

35

40

$10

The Incidence of an Excise TaxWhen a tax is imposed on suppliers,

consumers pay more.

And suppliers

receive less.

Quantity

Pri

ce

100 200 300 400 500

5

10

15

20

25

30

35

40

$10

Inelastic demand

(quantity not affected much by

price.)

and only a small portion by producers.

Most of the tax is born by

consumers…

Quantity

Pri

ce

100 200 300 400 500

5

10

15

20

25

30

35

40

$10

Elastic demand

(quantity highly affected by price.)

… and a large portion paid by

suppliers.

Tax results in a small price increase…

Quantity

Pri

ce

100 200 300 400 500

5

10

15

20

25

30

35

40

$10

Perfectly Elastic Supply

(horizontal supply curve) Price increases as much as the tax.