Vous êtes sur la page 1sur 63

4.

Elasticity
approach

Total expenditure (Total sales)


=PQ
Total Cost
= direct cost + indirect cost
Profit = Total sales - Total Cost

implies lowering price


means more sales

NCCU 2006

Elas 2

Or
?

What do you think?


Could

reducing the supply of illegal drugs


cause an increase in drug-related
burglaries?

NCCU 2006

Elas 3

The Effect of Extra Custom


Patrols on the Market for Illicit Drugs
Total Expenditure = P x Q
S
$250
= $50 x 50
S
$320
= $80 x 40

P($/ounce)

80

S
50

D
40

50

Q(1,000s of ounces/day)

NCCU 2006

Elas 4

Using Price Elasticity of Demand:


The War on Drugs

Every year U.S. Government spends about $20


billion on efforts to restrict the supply of drugs
Figure (a)
Market

for heroin without government intervention

Figure (b)
Result

of government efforts to restrict supply


(current policy)

Figure (c)
Results

of an effective policy of reducing demand

NCCU 2006

Elas 5

3 conditions in the War on Drugs


(a)

(b)

Price
per
Unit

S1
A

Price
per
Unit

P2
P1

P1

(c)
S2
B

S1

Price
per
Unit

Q1
Quantity

P1
P3

D1

S1

D1
Q2 Q1
Quantity

NCCU 2006

D1

D2
Q3

Q1
Quantity

Elas 6

Price Elasticity of Demand

Elasticity
A measure

of the extent to which quantity


demanded and quantity supplied respond
to variations in price, income, and other
factors.

NCCU 2006

Elas 7

Price Elasticity of Demand

Defined
Generally
A

measure of the responsiveness of the


quantity demanded of a good to a change in
the price of that good

Formally
The

percentage change in the quantity


demanded that results from a 1 percent change
in its price

NCCU 2006

Elas 8

Price Elasticity of Demand

Measuring Price Elasticity of Demand


Percentage Change in Quantity Demanded
Percentage Change in Price

NCCU 2006

Elas 9

Price Elasticity of Demand

Assume
The

price of pork falls by 2% and the


quantity demanded increases by 6%
Then

the price elasticity of demand for pork is

6
3
2
NCCU 2006

Elas 10

Price Elasticity of Demand

Measuring Price Elasticity of Demand


Percentage Change in Quantity Demanded
Percentage Change in Price

Observations
Price

elasticity of demand will always be


negative (i.e., an inverse relationship
between price and quantity)
For convenience we drop the negative sign
NCCU 2006

Elas 11

Price Elasticity of Demand

When

Measuring Price Elasticity of Demand

Percentage Change in Quantity Demanded


Percentage Change in Price

> 1: elastic
is < 1: inelastic

= 1: unit elastic

NCCU 2006

Elas 12

Elastic and Inelastic Demand

Unit elastic
Inelastic

Elastic

NCCU 2006

Price elasticity
of demand

Elas 13

Price Elasticity of Demand

What is the elasticity of demand for


pizza?
Originally
Price

= $1/slice
Quantity demanded = 400 slices/day
New
Price

= $0.97/slice
Quantity demanded = 404 slices/day, then
%
Change in Quantity 1

% Change in Price

: Inelastic

NCCU 2006

Elas 14

Price Elasticity of Demand

What is the elasticity of season ski passes?


Originally
Price

= $400
Quantity demanded = 10,000 passes/year
New
Price

= $380
Quantity demanded = 12,000 passes/year, then

% Change in Quantity 20

: Elastic
% Change in Price
5
NCCU 2006

Elas 15

Determinants of
Price Elasticity of Demand
1.
2.
3.

Substitution Possibilities
Budget Share
Time

NCCU 2006

Elas 16

Price Elasticity (in US) Estimates


for Selected Products
Good or service

Price elasticity

Green peas

2.80

Restaurant meals

1.63

Automobiles

1.35

Electricity / gasoline?

1.20

Beer

1.19

Movies

0.87

Air travel (foreign)

0.77

Shoes

0.70

Coffee

0.25

Theater, opera

0.18

NCCU 2006

WHY?

Elas 17

Question?

Why is the price elasticity of demand


more than 14 times larger for
green peas
than for
theater and opera
performances?

NCCU 2006

Elas 18

Discussion

Economic Naturalist
Will

higher taxes on cigarettes curb


teenage smoking?
Why was the luxury tax on yachts such a
disaster?

NCCU 2006

Elas 19

A Graphical Interpretation
of Price Elasticity

For small changes in price

Q Q
Price elasticity
P P
Where Q is the original quantity and P is the original
price

NCCU 2006

Elas 20

A Graphical Interpretation
of Price Elasticity

Example
Originally
Price

(P) = $100
Quantity (Q) = 20
New
Price

(P) = $105
Quantity (Q) = 15

5 20 25

5 : Elastic
5 100
5
NCCU 2006

Elas 21

A Graphical Interpretation
of Price Elasticity of Demand
P

Pr ice elasticity at A

slope

Price

P
P-

Q+

Quantity

NCCU 2006

Elas 22

Calculating Price Elasticity of Demand

20

vertical intercept
20
slope

4
horizontal intercept
5

16

8 1 8 2
A x

3 4 12 3

Price

12

8
4

Quantity

NCCU 2006

Elas 23

Calculating Price Elasticity of Demand

20

Question
What is the price elasticity
of demand when P = $4?

16

Price

12

8
4

Quantity

NCCU 2006

Elas 24

Price Elasticity and the


Steepness of the Demand Curve
12

What is the price elasticity of


demand when P = $4?
D1

4
D1
4

Price

6
4

D2

1
1
12 2
6

4 1
D2
2

4
12

12

Quantity

NCCU 2006

Elas 25

Price Elasticity and the


Steepness of the Demand Curve
For D2 when P = $1

12

Price

D1

1
D2

10

1
1

6
5
12

D2
1
4

10

12

Quantity

NCCU 2006

Elas 26

Price Elasticity and the


Steepness of the Demand Curve
Observation

12

Price

If two demand curves have a


point in common, the steeper
curve must be less elastic with
respect to price at that point

D1

D2
1
4

10

12

Quantity

NCCU 2006

Elas 27

Price Elasticity Regions along


a Straight-Line Demand Curve
Observation
Price elasticity varies at
every point along a straightline demand curve

Price

1
1

a/2

b/2

Quantity

NCCU 2006

Elas 28

Perfectly Elastic Demand Curve

Price

Perfectly elastic
demand (elasticity )

Quantity

NCCU 2006

Elas 29

Perfectly Inelastic Demand Curve

Price

Perfectly inelastic
demand (elasticity 0)

Quantity

NCCU 2006

Elas 30

Two Points on a Demand Curve


What is the price elasticity of demand?

Price

4
3

If P 4 and Q 4 then 2
If P 3 and Q 6 then 1

A
P

B
Q

12

Quantity

NCCU 2006

Elas 31

A Graphical Interpretation
of Price Elasticity

The Midpoint Formula

Q Q A QB / 2

P PA PB / 2
and

Q Q A QB

P PA PB
NCCU 2006

Elas 32

Two Points on a Demand Curve


Then the price elasticity of
demand between A and B:

2/ 4 6

1 .4
1/ 4 3

Price

4
3

A
P

B
Q

12

Quantity

NCCU 2006

Elas 33

Elasticity and Total Expenditure

Total Expenditure = P x Q
Market

demand measures the quantity (Q)


at each price (P)

Total Expenditure = Total Revenue

NCCU 2006

Elas 34

The Demand Curve for Movie Tickets

12

Price ($/ticket)

10

Total Expenditure
= $1,000/day

8
6
4

2
0

Quantity (100s of tickets/day)

NCCU 2006

Elas 35

The Demand Curve for Movie Tickets

12

Price ($/ticket)

10

Total Expenditure
= $1,600/day

8
6

4
2
0

Quantity (100s of tickets/day)

NCCU 2006

Elas 36

Elasticity and Total Expenditure

What do you think?


Will

increasing the market price always


increase total revenue?

NCCU 2006

Elas 37

Again,
?
NCCU 2006

Elas 38

The Demand Curve for Movie Tickets

12

Total Expenditure
= $1,600/day

Price ($/ticket)

10
8
6
4
2
0

Quantity (100s of tickets/day)

NCCU 2006

Elas 39

The Demand Curve for Movie Tickets


Total Expenditure
= $1,000/day

12

Price ($/ticket)

10
8
6
4

2
0

Quantity (100s of tickets/day)

NCCU 2006

Elas 40

Elasticity and Total Expenditure

General Rule
A price

increase will increase total revenue


when the % change in P is greater than the
% change in Q.

NCCU 2006

Elas 41

The Demand Curve for Movie Tickets

12

Price ($/ticket)

10
8
6
4
2
0

Quantity (100s of tickets/day)

NCCU 2006

Elas 42

Total Expenditure
as a Function of Price
Price ($/ticket)

Total expenditure ($/day)

12

10

1,000

1,600

1,800

1,600

1,000

0
NCCU 2006

Elas 43

Total Expenditure
as a Function of Price
Total revenue is at a maximum at the
midpoint on a straight-line demand curve
12

1,800
1,600
Total expenditure ($/day)

Price ($/ticket)

10
8
6
4
2
0

1,000

Quantity (100s of tickets/day)

Price ($/ticket)

NCCU 2006

Elas 44

10

12

Elasticity and Total Expenditure

What do you think?


Should

a rock band raise or lower its price


to increase total revenue?

Assume
P $20
Q 5,000
3
NCCU 2006

Elas 45

Elasticity and Total Expenditure

What do you think?


Should

a rock band raise or lower its price to


increase total revenue?

Then
Total

revenue = $20 x 5,000 =


$100,000/week
If P is increased 10%, Q will decrease 30%
Total

If

revenue = $22 x 3,500 = $77,000/week

P is lowered 10%, Q will increase 30%

Total

revenue = $18 x 6,500 = $177,000/week


NCCU 2006

Elas 46

Elasticity and Total Expenditure

Rule
When

price elasticity is greater than 1,


changes in price and changes in total
expenditures always move in opposite
directions.
When price elasticity is less than 1, changes
in price and changes in total expenditures
always move in the same direction.

NCCU 2006

Elas 47

Elasticity and Total Expenditure

Cross-Price Elasticity of Demand


The

percentage by which quantity demanded


of the first good changes in response to a 1
percent change in the price of the second
good

NCCU 2006

Elas 48

Elasticity and Total Expenditure

Cross-Price Elasticity of Demand


Substitute

Goods

When

the cross-price elasticity of demand is


positive

Complement

Goods

When

the cross-price elasticity of demand is


negative

NCCU 2006

Elas 49

Elasticity and Total Expenditure

Income Elasticity of Demand


The

percentage by which quantity


demanded changes in response to a 1
percent change in income

NCCU 2006

Elas 50

Elasticity and Total Expenditure

Income Elasticity of Demand


Normal

Goods

Income

Inferior

elasticity is positive

Goods

Income

elasticity is negative

NCCU 2006

Elas 51

The Price Elasticity of Supply

Price Elasticity of Supply


The

percentage change in the quantity


supplied that occurs in response to a 1
percent change in price

Q Q
Price elasticity of supply
P P
P
Price elasticity of supply
Q
NCCU 2006

slope
Elas 52

Calculating the Price


Elasticity of Supply Graphically
A 4 1212 4 1
B

A
Q

Price

B 5 15 15 5 1

12

15

Quantity

NCCU 2006

Elas 53

A Supply Curve for Which Price


Elasticity Declines as Quantity Rises
A 4 2 2 2
B

5
A

Price

5
B 5 3 1
3

Quantity

NCCU 2006

Elas 54

A Perfectly Inelastic Supply Curve


What is the price elasticity of supply of land
within the borough limits of Manhattan?

Price ($/acre)

Elasticity = 0 at every
point along a vertical
supply curve

0
Quantity of land in Manhattan
(1,000s of acres)

NCCU 2006

Elas 55

A Perfectly Elastic Supply Curve

Price (cents/cup)

What is the price elasticity of supply of lemonade?


If MC is constant, then the
price elasticity of supply at every point
along a horizontal supply curve is infinite
S

14

0
Quantity of lemonade
(cups/day)

NCCU 2006

Elas 56

The Price Elasticity of Supply

Determinants of Supply Elasticity


Flexibility

of inputs
Mobility of inputs
Ability to produce substitute inputs
Time

NCCU 2006

Elas 57

The Price Elasticity of Supply

Economic Naturalist
Why

are gasoline prices so much more


volatile than car prices?
Differences

in markets

o Demand for gasoline is more inelastic


o Gasoline market has larger and more frequent
supply shifts

NCCU 2006

Elas 58

Greater Volatility in
Gasoline Prices than in Car Prices
S

Gasoline
Price ($/gallon)

S
1.69

1.02
D

6 7.2
Quantity
(millions of gallons/day)

NCCU 2006

Elas 59

Greater Volatility in
Gasoline Prices than in Car Prices
Cars
Price ($1,000s/car)

S
S

17
16.4
D

11 12
Quantity
(1,000s of cars/day)
Cars

NCCU 2006

Elas 60

What do you think?

How would elasticity of supply and


fluctuating demand impact price
volatility?

NCCU 2006

Elas 61

The Price Elasticity of Supply

Unique and Essential Inputs: The


Ultimate Supply Bottleneck
Why

does Shaquille ONeal get paid over


$120 million over a seven-year contract?

NCCU 2006

Elas 62

End

4.Elasticity
approach

Vous aimerez peut-être aussi