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Elasticity SFLS
- 1.
- 2. DEMAND (shifts) = LessDemand at the same price = More Demand at the same price Elasticity by how much? 多少? = Changes in Demand without the price changing Shift Left Shift Right
- 3. Decrease Price So ifyou own a store, sell coke and lower your price…
- 4. Decrease PriceA littlemore Customers… Do you get…
- 5. Decrease Price Or alot more Customers? Or…
- 6.
- 7. A little Customers…Increase Price
- 8. Or a lotmore Customers? Increase Price
- 9. Example Question: You owna tea shop and sell your own specially made tea. You sell about 5000kg of tea each month at about 70rmb for 1kg. Your costs of producing this tea is rising, (as well as the opportunity cost of your time) so you are considering raising your price to 90rmb per kg. The law of demand says if you raise your price you will sell less tea, but the next question is by how much? - Also how will this effect your actual revenue 收入? - Will you make less profit or more profit?
- 10. Elasticity Textbook Definition: Elasticityis a numerical measure of the responsiveness of Qd or Qs to one of its determinants. Easier Definition: Elasticity measures how much one variable responds to changes in another variable. It shows how much things will change due to a change it the price. Even Easier Definition:
- 11. Elasticity 4 Types ofElasticity: 1.) (PED) Price Elasticity of Demand 2.) (PES) Price Elasticity of Supply 3.) (XED)Cross Elasticity of Demand 4.) (YED)Income Elasticity of Demand Drop the negative sign ( - ) Do NOT drop the negative sign ( -)
- 12. Elasticity 4 Types ofElasticity: 1.) (PED) Price Elasticity of Demand 2.) (PES) Price Elasticity of Supply 3.) (XED)Cross Elasticity of Demand 4.) (YED)Income Elasticity of Demand Drop the negative sign ( - ) Do NOT drop the negative sign ( -)
- 13. 1.) (PED) PriceElasticity of Demand - is the measurement of how demand for a good responds to a change in price. ****easy way to remember equation: Q before you Pay Equation: ________% Q ________- Percent change in Quantity - Percent change in Price P%
- 14. Queuing 排队 Páiduì Rememberin English not Chinese
- 15. 1.) (PED) PriceElasticity of Demand - is the measurement of how demand for a good responds to a change in price. *easy way to remember equation: Q before you Pay ________% Q ________- Percent change in Quantity - Percent change in Price P% We will only deal with absolute values here, so when doing the equation always drop the negative sign (-) Equation:
- 16. You own atea shop and sell your own specially made tea. You sell about 5000kg of tea each month at about 70rmb for 1 kg. So if… P = 70rmb and the Q = 5000kg What is the Price Elasticity of Demand if after you change your price, these are your shops new numbers… P = 90rmb and the Q = 3000kg Example Question:
- 17. % change inQ (3000 – 5000)/5000 = I -40% I % change in P (90 – 70)/70 = 29% The (PED) price elasticity of demand equals 40% 29% = 1.38 1.) P = 70rmb and the Q = 5000kg 2.) P = 90rmb and the Q = 3000kg Example Question: ________% Q P% ________
- 18. Starbucks raising theprice of it’s coffee from 30rmb to 50rmb and it’s sales decrease from 12 to 8 cups an hour. so if… P = 30rmb and Q = 12 cups What is the Price Elasticity of Demand if Starbucks new numbers are… P = 50rmb and Q = 8 cups Another Example Question:
- 19. Another Example Question: 1.)P = 30rmb and the Q = 12 cups 2.) P = 50rmb and the Q = 8 cups % change in Q (8 – 12)/12 = I -33% I % change in P (50 – 30)/30 = 67% The (PED) price elasticity of demand equals 33% 67% = .5 % Q P% ________
- 20. Ok so theanswer for the tea shop question is 1.38 Ok so the answer for the starbucks question is .5 So what do these numbers mean?
- 21. Demand is Elasticif it is greater than 1. ( > 1) - a small change in price causes a relatively large change in quantity demanded. Demand is Inelastic if it is less than 1. ( < 1) - a relatively larger change in price causes a small change in quantity demanded. Demand is Unit-Elastic if it is exactly 1. ( = 1) - a change in price causes a proportional change in quantity demanded. Elasticity Elastic Inelastic Unit-Elastic
- 22. 1.38 is Elasticso a price change has a large effect on the quantity .5 is Inelastic which means the price change doesn’t effect the quantity very much
- 23. 1 RMB percan Now only 0.9 RMB After small price change… Before price change… = large number of more buyers Demand is Elastic if it is greater than 1. ( > 1) = normal amount of buyers Elastic
- 24. D P Q Small % change Large% change Demand is Elastic if it is greater than 1. ( > 1)Elastic 1 RMB per can After small price change… Before price change… Now only 0.9 RMB
- 25. D P Q Small % change Large% change 1 RMB per can Now 1.1 RMB per can Demand is Elastic if it is greater than 1. ( > 1)Elastic
- 26. 2.5 RMB Now only . 2RMB After larger price change… Before price change… = much few more buyers = normal amount of buyers Demand is Inelastic if it is less than 1. ( < 1)Inelastic
- 27. D P Q Large % change small% change 2.5 RMB Now only . 2 RMB After larger price change… Before price change… Demand is Inelastic if it is less than 1. ( < 1)Inelastic
- 28. D P Q Large % change small% change 2.5 RMB After larger price change… Before price change… Demand is Inelastic if it is less than 1. ( < 1)Inelastic Now cost 3 RMB
- 29. Demand is Elasticif it is greater than 1. ( > 1) - a small change in price causes a relatively large change in quantity demanded. Demand is Inelastic if it is less than 1. ( < 1) - a relatively larger change in price causes a small change in quantity demanded. Demand is Unit-Elastic if it is exactly 1. ( = 1) - a change in price causes a proportional change in quantity demanded. Elasticity Elastic Inelastic Unit-Elastic
- 30. P Q P Q P Q P Q P Q Perfectly Elastic Demand Elastic Demand Unit-Elastic Demand Inelastic Demand Perfectly Inelastic Demand Elasticif it is greater than 1 ( > 1) Inelastic if it is less than 1 ( < 1) Unit -Elastic if it is equal to 1 ( = 1)
- 31. Slope and Elasticityis NOT the same thing!
- 32. Elasticity of aLinear Demand Curve The slope of a linear demand curve is constant, but its elasticity is not. P Q $30 20 10 $0 0 20 40 60 200% 40% = 5.0E = 67% 67% = 1.0E = 40% 200% = 0.2E =
- 33. Elasticity of aLinear Demand Curve The slope of a linear demand curve is constant, but its elasticity is not. P Q $30 20 10 $0 0 20 40 60 Top part of a curve is elastic > 1 Middle part is as close to unit elastic as possible = 1 Bottom part of a curve is Inelastic < 1
- 34. Reasons or Influencesof the (PED) Price Elasticity of Demand 1.) Availability of Substitutes 2.) Good vs Luxury 3.) How narrow it is defined 4.) Time 4 reasons for Elasticity:
- 35. Reasons or Influencesof the (PED) Price Elasticity of Demand 1.) Availability of Substitutes 2.) Good vs Luxury 3.) How narrow it is defined 4.) Time 4 reasons for Elasticity: To understand the determinants of price elasticity, I will give you an examples for each one. Each compares two common goods. In each example: - Suppose the prices of both goods rise by 20%. - Note the difference in Quantities.
- 36. Reasons or Influencesof the (PED) 1.) Availability of Substitutes - Price elasticity is higher when close substitutes are available. Sunscreen 防晒 vs. Breakfast cereal 早餐谷物 The prices of both rise by 20%.Example: Sunscreen has no close substitutes, so consumers would probably not buy much less if its price rises. Breakfast cereal has close substitutes so buyers can easily switch if the price rises. So it’s Elastic > 1So it’s Inelastic < 1
- 37. Insulin 胰岛素 vs.Vacation Cruises To millions of diabetics 糖尿病, insulin is a necessity. A rise in its price would cause little or no decrease in demand. A cruise is a luxury. If the price rises, some people will decide not to do it. 2.) Good vs Luxury - Price elasticity is higher for luxuries than for necessities. So it’s Elastic > 1So it’s Inelastic < 1 Reasons or Influences of the (PED) The prices of both rise by 20%.Example:
- 38. “Blue Jeans” 蓝色牛仔裤vs. “Clothing” For a narrowly defined good such as blue jeans, there are many substitutes (khakis, shorts, Speedos). There are fewer substitutes available for broadly defined goods. 3.) How narrow the market is defined - Price elasticity is higher for narrowly defined goods So it’s Elastic > 1 So it’s Inelastic < 1 Reasons or Influences of the (PED) The prices of both rise by 20%.Example:
- 39. Gasoline in ShortRun vs. Gasoline in Long Run There’s not much people can do in the short run, other than ride the bus or carpool. In the long run, people can buy smaller cars or live closer to where they work. 4.) Time -Price elasticity is higher in the long run than the short run. So it’s Inelastic > 1 So it’s Elastic < 1 Reasons or Influences of the (PED) The prices of both rise by 20%.Example:
- 40. Total Revenue and(PED) Price Elasticity of Demand
- 41. Total Revenue and(PED) Price Elasticity of Demand Total Revenue - The total amount spent on the of sales of a good or service. Total revenue test Do the equation above before the changes and after the changes are made to compare if the outcome is welcomed or not. Equation: Price × Quantity Sold ( P )× ( Q )
- 42. Starbucks raising theprice of it’s coffee from 30rmb to 50rmb and it’s sales decrease from 12 to 8 cups an hour. so if… P = 30rmb and Q = 12 cups What is the Price Elasticity of Demand if Starbucks new numbers are… P = 50rmb and Q = 8 cups Another Example Question:
- 43. P Q D 50 8 B 30 12 A Demand for coffee PointA 30 x 12 = 360 Example Total Revenue Test
- 44. P Q D 50 8 B 30 12 A Demand for coffee PointA 30 x 12 = 360 Point B 50 x 8 = 400 The total revenue is increased from 360 to 400. So an increase in price led to more revenue since the demand is inelastic, you can raise your price and make more money, though less people buy it. Example Total Revenue Test
- 45. P Q D 80 8 B 60 20 A Demand for tea PointB 80 x 8 = 640 Example Total Revenue Test
- 46. P Q D 80 8 B 60 20 A Demand for tea PointB 80 x 8 = 640 Point A 60 x 20 = 1200 The total revenue is increased from 640 to 1200. So an decrease in price led to more revenue since this demand is elastic, you can lower your price and make more money. Example Total Revenue Test
- 47. Elasticity and TotalRevenue When a seller raises the price of a good, there are two countervailing 反补贴 effects in action: Price Effect: - After a price increase, each unit sold sells at a higher price, which tends to raise revenue. Quantity Effect: - After a price increase, fewer units are sold, which tends to lower revenue. ( More Inelastic) ( More Elastic )
- 48. Example Question: You owna tea shop and sell your own specially made tea. You sell about 5000kg of tea each month at about 70rmb for 1kg. Your costs of producing this tea is rising, (as well as the opportunity cost of your time) so you are considering raising your price to 90rmb per kg. The law of demand says if you raise your price you will sell less tea, but the next question is by how much? - Also how will this effect your actual revenue 收入? - Will you make less profit or more profit?
- 49. Continuing our scenario,if you raise your price from 70 to 90, would your revenue rise or fall? Total Revenue = A price increase has two effects on revenue: 1.) Higher P means more revenue on each unit you sell. 2.) But you sell fewer units (lower Q), due to Law of Demand. Which of these two effects is bigger? It depends on the Price Elasticity of Demand. Example Question: ( P )× ( Q )
- 50. from 70 to90, and quantity change from 5,000 to 3,000, would your revenue rise or fall? P = 70rmb and the Q = 5000kg P = 90rmb and the Q = 3000kg Before change: 70 x 5000 = 350,000 RMB After change: 90 x 3000 = 270,000 RMB Example Question: So you would lose money if you raise your price, the quantity effect is stronger and your demand is Elastic
- 51. % change inQ (3000 – 5000)/5000 = I -40% I % change in P (90 – 70)/70 = 29% The (PED) price elasticity of demand equals 40% 29% = 1.38 1.) P = 70rmb and the Q = 5000kg 2.) P = 90rmb and the Q = 3000kg Example Question: ________% Q P% ________
- 52. Increase in Price Inthis case, the quantity effect is stronger than the price effect. = Lower Total Revenue Elasticity and Total Revenue Elastic
- 53. If the examplewas changed a little, a much bigger difference would be found. For example, let’s say the increase of price from 70 to 90 only decreased quantity from 5,000 to 4,000 P = 70rmb and the Q = 5000kg P = 90rmb and the Q = 4000kg Before change: 70 x 5000 = 350,000 RMB After change: 90 x 4000 = 360,000 RMB Example Question Changed a little: So you would gain more money if you raise your price, and the price effect is stronger and your demand is Inelastic
- 54. % change inQ (4000 – 5000)/5000 = I -20% I % change in P (90 – 70)/70 = 29% The (PED) price elasticity of demand equals 20% 29% = .69 1.) P = 70rmb and the Q = 5000kg 2.) P = 90rmb and the Q = 4000kg Example Question: ________% Q P% ________
- 55. Increase in Price Inthis case, the quantity effect is stronger than the price effect. = Lower Total Revenue Elasticity and Total Revenue Elastic Inelastic Increase in Price In this case, the price effect is stronger than the quantity effect. = Higher Total Revenue
- 56. Increase in Price Inthis case, the quantity effect is stronger than the price effect. = Lower Total Revenue Elasticity and Total Revenue Elastic Inelastic Increase in Price In this case, the price effect is stronger than the quantity effect. = Higher Total Revenue Unit-Elastic Increase in Price In this case, they offset each other and there is no gain = No change in Total Revenue
- 57. Elasticity 4 Types ofElasticity: 1.) (PED) Price Elasticity of Demand 2.) (PES) Price Elasticity of Supply 3.) (YED)Income Elasticity of Demand 4.) (XED) Cross Elasticity of Demand Drop the negative sign ( - ) Do NOT drop the negative sign ( -)
- 58. 2.) (PES) PriceElasticity of Supply *easy way to remember equation: Q before you Pay ________% Q ________- Percent change in Quantity - Percent change in Price P% We will only deal with absolute values here, so when doing the equation always drop the negative sign (-) Equation: - is the measurement of how supply for a good responds to a change in price.
- 59. P Q P Q P Q P Q P Q Elastic if itis greater than 1 ( > 1) Unit -Elastic if it is equal to 1 ( = 1) Inelastic Supply Perfectly Inelastic Supply Inelastic if it is less than 1 ( < 1) Unit-Elastic Supply Perfectly Elastic Supply Elastic Supply
- 60. Reasons or Influencesof the (PES) Price Elasticity of Supply 4 reasons for Elasticity: 1.) Production Possibilities or Availability of Inputs 2.) Storage Possibilities or Time Hurrah! only two this time!
- 61. Corn vs. BeachfrontProperty Corn becomes more profitable A rise in its price would cause a rise in the supply of land for corn Even with a increase of price their isn’t much more beachfront property to be had available 1.) Production possibilities - Goods that are fixed quantity are inelastic So it’s Elastic > 1 So it’s Inelastic < 1 Reasons or Influences of the (PED) The prices of both rise by 20%.Example:
- 62. Fresh Strawberries vs.Canned Fruit 水果罐头 Strawberries will become rotten and cannot be stored for a long time, in the short run, the price doesn’t change the supply much Canned fruit can last a long time and an increase in prices will increase the supply, particularly over the long term. 2.) Storage possibilities -Some things are almost impossible to store in the short run, but over time, plans can change So it’s Elastic > 1So it’s Inelastic < 1 Reasons or Influences of the (PED) The prices of both rise by 20%.Example:
- 63. Elasticity 4 Types ofElasticity: 1.) (PED) Price Elasticity of Demand 2.) (PES) Price Elasticity of Supply 3.) (XED)Cross Elasticity of Demand 4.) (YED)Income Elasticity of Demand Drop the negative sign ( - ) Do NOT drop the negative sign ( -)
- 64. 3.) (XED) Cross Elasticityof Demand - It measures responsiveness of the demand for a good to a change in the price of a substitute or complement Equation: Must keep the negative sign ( -) now! Without it you cannot know the answer! ____________% Q of A _____________ - Percent change in Quantity of good A - Percent change in Price of good BP of B%
- 65. Demand is Elasticif it is greater than 1. ( > 1) - a small change in price causes a relatively large change in quantity demanded. Demand is Inelastic if it is less than 1. ( < 1) - a relatively larger change in price causes a small change in quantity demanded. Demand is Unit-Elastic if it is exactly 1. ( = 1) - a change in price causes a proportional change in quantity demanded. Elasticity Elastic Inelastic Unit-Elastic
- 66. 3.) (XED) Cross Elasticityof Demand - It measures responsiveness of the demand for a good to a change in the price of a substitute or complement (I.) If it is a positive number then it is a substitute. - Price of A and the Quantity of B move in the same direction.
- 67. Price of thisgoes up i.) Substitute Increase Demand of this = Buy less of it but more of this = Price of this goes down Decrease Demand of this = Buy more of this but less of this =
- 68. Example Question: If Coffeeis a substitute for Tea, then if the price of tea changes how much will that effect the quantity of coffee? 3.) (XED) Cross Elasticity of Demand P of coffee falls 10 % Q of tea decrease 5% - 5% - 10% = .5________% Q of A P of B%
- 69. The (XED) fora substitute is positive. Example: Coffee is a substitute for Tea. A fall in the price of Coffee = Lower Demand for Tea *** Same is true for the reverse *** 3.) (XED) Cross Elasticity of Demand
- 70. 3.) (XED) Cross Elasticityof Demand - It measures responsiveness of the demand for a good to a change in the price of a substitute or complement (II.) If it is a negative number then it is a complement. - Price of A and the Quantity of B move in the opposite direction.
- 71. Price of thisgoes up Decrease demand of this = Buy less of it and buy less of this = Price of this goes down Increase demand of this = Buy more of it and buy more of this = (the price of this didn’t change)i.) Complement
- 72. Example Question: If sugaris a complement for coffee, then if the price of coffee changes how much will that effect the quantity of sugar? 3.) (XED) Cross Elasticity of Demand P of coffee falls 10 % Q of sugar increases 2% ________% Q of A P of B% 2% - 10% = -.2
- 73. The (XED) fora complement is negative. Example: Sugar is a complement for Coffee. A fall in the price of Coffee = Higher Demand for Sugar *** Same is true for the reverse *** 3.) (XED) Cross Elasticity of Demand
- 74. Elasticity 4 Types ofElasticity: 1.) (PED) Price Elasticity of Demand 2.) (PES) Price Elasticity of Supply 3.) (XED)Cross Elasticity of Demand 4.) (YED)Income Elasticity of Demand Drop the negative sign ( - ) Do NOT drop the negative sign ( -)
- 75. 4.) (YED) Income Elasticityof Demand - A measure of the extent to which the demand for a good changes when income changes measuring whether good is normal or inferior. Equation: Must keep the negative sign ( -) now! Without it you cannot know the answer! ____________% Q ____________- Percent change in Quantity - Percent change in IncomeIncome%
- 76. 4.) (YED) Income Elasticityof Demand - A measure of the extent to which the demand for a good changes when income changes measuring whether good is normal or inferior. (I.) If increased income means more demand then it is a normal good and is positive number. The quantity demanded of a good and income of it change in the same direction.
- 77. Income Increase i.) Normal good DemandincreasesBuy more of this at the same price Income Decrease Demand decreasesBuy less of this at the same price
- 78. 4.) (YED) Income Elasticityof Demand - A measure of the extent to which the demand for a good changes when income changes measuring whether good is normal or inferior. (II.) If increased income means less demand then it is an inferior good and is negative number. The quantity demanded of a good and income of it change in the opposite direction.
- 79. Income Increase Demand decreaseBuy lessof this at the same price Income Decrease Demand increasesBuy more of this at the same price ii.) Inferior good
- 80. So to Summarizeall of it now…
- 81. 1.) (PED) PriceElasticity of Demand - is the measurement of how demand for a good responds to a change in price. *easy way to remember equation: Q before you Pay ________% Q ________- Percent change in Quantity - Percent change in Price P% We will only deal with absolute values here, so when doing the equation always drop the negative sign (-) Equation:
- 82. Reasons or Influencesof the (PED) Price Elasticity of Demand 1.) Availability of Substitutes 2.) Good vs Luxury 3.) How narrow it is defined 4.) Time 4 reasons for Elasticity:
- 83. 2.) (PES) PriceElasticity of Supply *easy way to remember equation: Q before you Pay ________% Q ________- Percent change in Quantity - Percent change in Price P% We will only deal with absolute values here, so when doing the equation always drop the negative sign (-) Equation: - is the measurement of how supply for a good responds to a change in price.
- 84. Reasons or Influencesof the (PES) Price Elasticity of Supply 4 reasons for Elasticity: 1.) Production Possibilities or Availability of Inputs 2.) Storage Possibilities or Time
- 85. Demand is Elasticif it is greater than 1. ( > 1) - a small change in price causes a relatively large change in quantity demanded. Demand is Inelastic if it is less than 1. ( < 1) - a relatively larger change in price causes a small change in quantity demanded. Demand is Unit-Elastic if it is exactly 1. ( = 1) - a change in price causes a proportional change in quantity demanded. Elasticity Elastic Inelastic Unit-Elastic
- 86. P Q P Q P Q P Q P Q Perfectly Elastic Demand Elastic Demand Unit-Elastic Demand Inelastic Demand Perfectly Inelastic Demand Elasticif it is greater than 1 ( > 1) Inelastic if it is less than 1 ( < 1) Unit -Elastic if it is equal to 1 ( = 1)
- 87. P Q P Q P Q P Q P Q Elastic if itis greater than 1 ( > 1) Unit -Elastic if it is equal to 1 ( = 1) Inelastic Supply Perfectly Inelastic Supply Inelastic if it is less than 1 ( < 1) Unit-Elastic Supply Perfectly Elastic Supply Elastic Supply
- 88. Total Revenue and(PED) Price Elasticity of Demand Total Revenue - The total amount spent on the of sales of a good or service. Total revenue test Do the equation above before the changes and after the changes are made to compare if the outcome is welcomed or not. Equation: Price × Quantity Sold ( P )× ( Q )
- 89. Elasticity and TotalRevenue When a seller raises the price of a good, there are two countervailing 反补贴 effects in action: Price Effect: - After a price increase, each unit sold sells at a higher price, which tends to raise revenue. Quantity Effect: - After a price increase, fewer units are sold, which tends to lower revenue. ( More Inelastic) ( More Elastic )
- 90. Elasticity and TotalRevenue Unit-Elastic Increase in Price In this case, they offset each other and there is no gain = No change in Total Revenue Increase in Price In this case, the quantity effect is stronger than the price effect. = Lower Total RevenueElastic Inelastic Increase in Price In this case, the price effect is stronger than the quantity effect. = Higher Total Revenue
- 91. 3.) (XED) Cross Elasticityof Demand - It measures responsiveness of the demand for a good to a change in the price of a substitute or complement (I.) If it is a positive number then it is a substitute. - Price of A and the Quantity of B move in the same direction.
- 92. 3.) (XED) Cross Elasticityof Demand - It measures responsiveness of the demand for a good to a change in the price of a substitute or complement (II.) If it is a negative number then it is a complement. - Price of A and the Quantity of B move in the opposite direction.
- 93. 4.) (YED) Income Elasticityof Demand - A measure of the extent to which the demand for a good changes when income changes measuring whether good is normal or inferior. (I.) If increased income means more demand then it is a normal good and is positive number. The quantity demanded of a good and income of it change in the same direction.
- 94. 4.) (YED) Income Elasticityof Demand - A measure of the extent to which the demand for a good changes when income changes measuring whether good is normal or inferior. (II.) If increased income means less demand then it is an inferior good and is negative number. The quantity demanded of a good and income of it change in the opposite direction.
- 95.