View
222
Download
5
Embed Size (px)
Citation preview
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.