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Elasticity
approach
NCCU 2006
Elas 2
Or
?
NCCU 2006
Elas 3
P($/ounce)
80
S
50
D
40
50
Q(1,000s of ounces/day)
NCCU 2006
Elas 4
Figure (b)
Result
Figure (c)
Results
NCCU 2006
Elas 5
(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
Elasticity
A measure
NCCU 2006
Elas 7
Defined
Generally
A
Formally
The
NCCU 2006
Elas 8
NCCU 2006
Elas 9
Assume
The
6
3
2
NCCU 2006
Elas 10
Observations
Price
Elas 11
When
> 1: elastic
is < 1: inelastic
= 1: unit elastic
NCCU 2006
Elas 12
Unit elastic
Inelastic
Elastic
NCCU 2006
Price elasticity
of demand
Elas 13
= $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
= $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
Green peas
2.80
Restaurant meals
1.63
Automobiles
1.35
Electricity / gasoline?
1.20
Beer
1.19
Movies
0.87
0.77
Shoes
0.70
Coffee
0.25
Theater, opera
0.18
NCCU 2006
WHY?
Elas 17
Question?
NCCU 2006
Elas 18
Discussion
Economic Naturalist
Will
NCCU 2006
Elas 19
A Graphical Interpretation
of Price Elasticity
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
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
20
Question
What is the price elasticity
of demand when P = $4?
16
Price
12
8
4
Quantity
NCCU 2006
Elas 24
4
D1
4
Price
6
4
D2
1
1
12 2
6
4 1
D2
2
4
12
12
Quantity
NCCU 2006
Elas 25
12
Price
D1
1
D2
10
1
1
6
5
12
D2
1
4
10
12
Quantity
NCCU 2006
Elas 26
12
Price
D1
D2
1
4
10
12
Quantity
NCCU 2006
Elas 27
Price
1
1
a/2
b/2
Quantity
NCCU 2006
Elas 28
Price
Perfectly elastic
demand (elasticity )
Quantity
NCCU 2006
Elas 29
Price
Perfectly inelastic
demand (elasticity 0)
Quantity
NCCU 2006
Elas 30
Price
4
3
If P 4 and Q 4 then 2
If P 3 and Q 6 then 1
A
P
B
Q
12
Quantity
NCCU 2006
Elas 31
A Graphical Interpretation
of Price Elasticity
Q Q A QB / 2
P PA PB / 2
and
Q Q A QB
P PA PB
NCCU 2006
Elas 32
2/ 4 6
1 .4
1/ 4 3
Price
4
3
A
P
B
Q
12
Quantity
NCCU 2006
Elas 33
Total Expenditure = P x Q
Market
NCCU 2006
Elas 34
12
Price ($/ticket)
10
Total Expenditure
= $1,000/day
8
6
4
2
0
NCCU 2006
Elas 35
12
Price ($/ticket)
10
Total Expenditure
= $1,600/day
8
6
4
2
0
NCCU 2006
Elas 36
NCCU 2006
Elas 37
Again,
?
NCCU 2006
Elas 38
12
Total Expenditure
= $1,600/day
Price ($/ticket)
10
8
6
4
2
0
NCCU 2006
Elas 39
12
Price ($/ticket)
10
8
6
4
2
0
NCCU 2006
Elas 40
General Rule
A price
NCCU 2006
Elas 41
12
Price ($/ticket)
10
8
6
4
2
0
NCCU 2006
Elas 42
Total Expenditure
as a Function of Price
Price ($/ticket)
12
10
1,000
1,600
1,800
1,600
1,000
0
NCCU 2006
Elas 43
Total Expenditure
as a Function of Price
Total revenue is at a maximum at the
midpoint on a straight-line demand curve
12
1,800
1,600
Total expenditure ($/day)
Price ($/ticket)
10
8
6
4
2
0
1,000
Price ($/ticket)
NCCU 2006
Elas 44
10
12
Assume
P $20
Q 5,000
3
NCCU 2006
Elas 45
Then
Total
If
Total
Elas 46
Rule
When
NCCU 2006
Elas 47
NCCU 2006
Elas 48
Goods
When
Complement
Goods
When
NCCU 2006
Elas 49
NCCU 2006
Elas 50
Goods
Income
Inferior
elasticity is positive
Goods
Income
elasticity is negative
NCCU 2006
Elas 51
Q Q
Price elasticity of supply
P P
P
Price elasticity of supply
Q
NCCU 2006
slope
Elas 52
A
Q
Price
B 5 15 15 5 1
12
15
Quantity
NCCU 2006
Elas 53
5
A
Price
5
B 5 3 1
3
Quantity
NCCU 2006
Elas 54
Price ($/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
Price (cents/cup)
14
0
Quantity of lemonade
(cups/day)
NCCU 2006
Elas 56
of inputs
Mobility of inputs
Ability to produce substitute inputs
Time
NCCU 2006
Elas 57
Economic Naturalist
Why
in markets
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
NCCU 2006
Elas 61
NCCU 2006
Elas 62
End
4.Elasticity
approach