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Elastcity of demand
The document provides an overview of elasticity in economics, explaining how it measures the responsiveness of one variable to another, particularly in demand and supply contexts. It discusses the concepts of price elasticity of demand and supply, including conditions for elastic and inelastic demand, methods to calculate elasticity, and the impact of various factors on elasticity. Additionally, it emphasizes the differences between elasticity and slope and provides examples of perfectly elastic and inelastic demand curves.
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Elastcity of demand
- 1. Prepared by: MilanPadariya
- 2. Elasticity is ameasure of the responsiveness of one variable to another. The greater the elasticity, the greater the responsiveness.
- 3. Q. What’s thedifference between an economist and a befuddled old man with Alzheimer’s? A. The economist is the one with a calculator.
- 4. Elasticity is ameasure of the responsiveness of one variable to another. The greater the elasticity, the greater the responsiveness.
- 5. The price elasticityof demand is the percentage change in quantity demanded divided by the percentage change in price.
- 6. According to thelaw of demand, whenever the price rises, the quantity demanded falls. Thus the price elasticity of demand is always negative. Because it is always negative, economists usually state the value without the sign.
- 7. Price elasticity ofdemand and supply gives the exact quantity response to a change in price.
- 8. Demand is elasticif the percentage change in quantity is greater than the percentage change in price. E > 1
- 9. Demand is inelasticif the percentage change in quantity is less than the percentage change in price. E<1
- 10. Elastic Demand meansthat quantity changes by a greater percentage than the percentage change in price.
- 11. Inelastic Demand meansthat quantity doesn't change much with a change in price.
- 12. When price elasticityis between zero and -1 we say demand is inelastic . When price elasticity is between -1 and - infinity, we say demand is elastic . When price elasticity is -1, we say demand is unit elastic .
- 13. Percentages allow usto have a measure of responsiveness that is independent of units. This makes comparisons of responsiveness of different goods easier.
- 14. To determine elasticitydivide the percentage change in quantity by the percentage change in price.
- 15. The end-point problem– the percentage change differs depending on whether you view the change as a rise or a decline in price.
- 16. Economists use theaverage of the end points to calculate the percentage change.
- 17. Price $26 24 22 20 18 16 14 0 B C (midpoint) A D Elasticity ofdemand between A and B = 1.27 10 12 14 Quantity of software (in hundred thousands)
- 18. What is theprice elasticity of demand between A and B? P $26 $23 $20 B Midpoint C A 10 12 14 Q2–Q1 ½(Q2+Q1) %ΔQ ED = %ΔP = P2–P1 ½(P2+P1) 10–14 ½(10+14) -.33 = 26–20 = .26 = 1.27 ½(26+20) D Q 7-18
- 19. Price elasticity ofsupply is the percentage change in quantity supplied divided by the percentage change in ES = % change in Quantity Supplied % change in Price • This tells us exactly how quantity supplied responds to a change in price • Elasticity is independent of units 7-19
- 20. Supply is elasticif the percentage change in quantity is greater than the percentage change in price Elastic supply is when ES > 1 • Supply is inelastic if the percentage change in quantity is less than the percentage change in price Inelastic supply is when ES < 1 7-20
- 21. What is theprice elasticity of supply between A and B? P S $5.00 B Midpoint C $4.75 $4.50 A 476 480.5 485 Q2–Q1 %ΔQ ½(Q2+Q1) ES = %ΔP = P2–P1 ½(P2+P1) 485–476 ½(485+476) 0.0187 0.18 = 5–4.50 = 0.105 = ½(5+4.50) Q 7-21
- 22. Wage per hour $6.00 5.50 5.00 4.50 4.00 3.50 3.00 0 A B C(midpoint) Elasticity of supply between A and B = 0.18 470 480 490 Quantity of workers
- 23. Q 2 −Q1 %∆ Q (Q 1 + Q 2 ) E= = P2 − P1 %∆ P 1 2 (P1 + P2 ) 1 2
- 24. $26 B Price 24 22 20 18 16 10 − 14 midpoint (14+ 10) Elasticity of demand between A and B: −4 − .33 ED = = 12 = = 1.27 26 − 20 6 .26 1 23 2 (26 + 20) 1 2 %∆ Q E= %∆P C A Demand 14 0 10 12 14 Quantity of software (in hundred thousands)
- 25. Wage per hour $6.00 5.50 5.00 4.50 E 4.00= 3.50 3.00 S 0 A 485 − 475 10 1 (485 + 475 ) .021 2 = 480 = = .2 5 − 4.50 .50 .105 1 4.75 2 (5 + 4.50) C B 470 480 490 Quantity of workers Elasticity of supply between A and B: E= %∆ Q %∆ P
- 26. Let us nowturn to a method of calculating the elasticity at a specific point, rather than over a range or an arc.
- 27. To calculate elasticityat a point, determine a range around that point and calculate the arc elasticity.
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- 29. Price $10 9 8 7 6 5 4 3 2 1 To calculate elasticityat a point determine a range around that point and calculate the arc elasticity. C E at A = 1 2 A 28 − 20 8 (28 + 20) 24 .33 = = = .66 5−3 2 .5 1 4 2 (5 + 3) B 20 24 28 Quantity 40
- 30. Two important pointsto consider: ◦ Elasticity is related (but is not the same as) slope. ◦ Elasticity changes along straight-line demand and supply curves.
- 31. Price $10 9 8 7 6 5 4 3 2 1 Demand A Supply EA = 2.33 D CE = 0.75 C 6 ED = 0.86 EB = 0.11 B 12 18 24 30 36 42 48 54 60 Quantity
- 32. Two important pointsto consider: ◦ Elasticity is related (but is not the same as) slope. ◦ Elasticity changes along straight-line demand and supply curves.
- 33. The steeper thecurve at a given point, the less elastic is supply or demand. There are two limiting examples of this.
- 34. When the curvesare flat, we call the curves perfectly elastic. • The quantity changes enormously in response to a proportional change in price (E = ∞).
- 35. When the curvesare vertical, we call the curves perfectly inelastic. • The quantity does not change at all in response to an enormous proportional change in price (E = 0).
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- 38. Perfectly Elastic DemandCurve ◦ The demand curve is horizontal, any change in price can and will cause consumers to change their consumption. Perfectly Inelastic Demand Curve ◦ The demand curve is vertical, the quantity demanded is totally unresponsive to the price. Changes in price have no effect on consumer demand. In between the two extreme shapes of demand curves are the demand curves for most products.
- 40. Elasticity is notthe same as slope. Elasticity changes along straight line supply and demand curves–slope does not.
- 41. Ed = ∞ $10 9 8 7 6 5 4 3 2 1 Elasticitydeclines along demand curve as we move toward the quantity axis Price Ed > 1 0 Ed = 1 Ed < 1 Ed = 0 1 2 3 4 5 6 7 8 9 10 Quantity
- 42. The Price Elasticityof Demand Along a Straight-line Demand Curve
- 43. As a generalrule, the more substitutes a good has, the more elastic is its supply and demand.
- 44. The less agood is a necessity, the more elastic its demand curve. • Necessities tend to have fewer substitutes than do luxuries.
- 45. Demand for goodsthat represent a large proportion of one's budget are more elastic than demand for goods that represent a small proportion of one's budget.
- 46. Goods that costvery little relative to your total expenditures are not worth spending a lot of time figuring out if there is a good substitute. • It is worth spending a lot of time looking for substitutes for goods that take a large portion of one’s income.
- 47. The larger thetime interval considered, or the longer the run, the more elastic is the good’s demand curve. ◦ There are more substitutes in the long run than in the short run. ◦ The long run provides more options for change.
- 48. The degree towhich the price elasticity of demand is inelastic or elastic depends on: ◦ How many substitutes there are ◦ How well a substitute can replace the good or service under consideration ◦ The importance of the product in the consumer’s total budget ◦ The time period under consideration