Price Elasticity of Demand
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1 rice Elasticity of Demand Demand A B The percentage change in the quantity demanded given a one percent change in the price. rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
2 Elasticity of Demand Illustrated erfectly Inelastic 2 1 The quantity demanded is unresponsive to changes in rice. E D = 0 rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
3 Elasticity of Demand Illustrated 1 A small increase in price will cause demand to drop off completely. E D = erfectly Elastic rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
4 Computing Elasticity Coefficient rice Elasticity of Demand = ercentage Change in uantity Demanded ercentage Change in rice Computed as the Absolute Value of the percentage change in the uantity Demanded divided by the percentage change in rice which caused it.
5 Computing Elasticity Coefficient E D = $2.20 (8-10) / 10 ($ $2.00) / $2.00 D 20% = = 2 10% $2.00 Relative to the Endpoint (10, 2) 8 10
6 Computing Elasticity Coefficient E D = (8-10) / 8 ($ $2.00) / $2.20 = 2.77 $2.20 $2.00 Relative to the Endpoint (8, 2.20) D 8 10
7 Computing Elasticity Coefficient E D = (8-10) / 9 ($ $2.00) / $2.10 = 2.34 $2.20 Relative to the Midpoint (9, 2.10) $2.10 $2.00 D
8 oint Elasticity at the Midpoint: A = (, ) = (9, 2.10) Let = and = 10-8 $2.20 $2.10 $2.00 E = D A (8-10) / 9 ($ $2.00) / $2.10 / = / D / = /
9 oint Elasticity at oint A: A Ratio of Two slopes Let = 2.10 and = 9 then E D = / / $2.20 $2.10 $2.00 A= (,) D E D = Slope OA Slope D O
10 Elasticity along A Curve Revenue x Slope of D Slope of Ray to Origin Elasticity /3 1 3/1=3 0 1/3 1 3 rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
11 Elasticity along A Curve A=(0,4) B=(1,3) C=(2,2) D=(3,1) E=(4,0) rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
12 Elasticity along A Curve E D = 1 E D =3 2 Elastic Demand E D =1 3 E D =1/3 4 Unit Elastic Demand E D =0 Inelastic Demand rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
13 Comparing Elasticities Since slope D 1 > slope D 2 then at point A: E 1 < E 2 - i.e. at a given point the relative size of the slopes indicates the relative size of the elasticities. A O D 1 D 2
14 Computing Income Elasticity Income Elasticity of Demand = ercent Change in uantity Demanded ercent Change in Income Computed as the percent change in the quantity demanded, at the given price, divided by the percent change in Income which caused the change.
15 Other Elasticities of Demand (a) Income Elasticity of Demand The amount by which the quantity demanded changes in response to a one-percent change in income Income elasticity = I I Slide 5-47
16 Income Elasticity... Types Y D > 0 Normal Goods Y D < 0 Inferior Goods Y D = 0 Income-neutral Goods rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
17 Other Elasticities of Demand (b) Cross rice Elasticity of Demand The amount by which the quantity demanded of one good changes in response to a one-percent change in the price of another good X X Cross - price elasticity = Y Y Slide 5-48
18 Other Elasticities of Demand (b) Cross rice Elasticity of Demand If the Cross-rice Elasticity is ositive then the commodities are Substitutes If the Cross-rice Elasticity is Negative then the commodities are Complements Slide 5-49
19 rice Elasticity of Supply The percentage change in quantity supplied rice B resulting from a one (1) percent change in price. A uantity rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
20 Ranges of Elasticity erfectly Elastic infinite Relatively Elastic >1 Unitary or Unit =1 Relatively Inelastic <1 erfectly Inelastic = 0 rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
21 Elasticity of Supply Illustrated erfectly Inelastic erfectly Elastic rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
22 Computing Elasticity Coefficient Elasticity of Supply = E S = ercent Change in uantity Supplied ercent Change in rice Therefore, / E S = / = / /
23 oint Elasticity of Supply at A E S = / / Slope of OA = Slope of S A S O
24 Elasticity of Supply Illustrated All rays through the origin are Unitary Elastic throughout. rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
25 Elasticity of Supply Illustrated Elasticity is always > 1 i.e. elastic. The Elasticity Decreases as we move up along a curve. rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
26 Elasticity of Supply Illustrated The Elasticity Increases as we move up along a curve. Elasticity is always < 1 i.e. inelastic. rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First Canadian Edition
27 Comparing Elasticities Since slope S 1 < slope S 2 then at point A: E 1 > E 2 S 2 S 1 A O
28 Comparing Elasticities Since slope S 1 < slope S 2 then at point A: E 1 > E 2 S 2 A S 1 O
29 Other Elasticities of Demand (a) Income Elasticity of Demand The amount by which the quantity demanded changes in response to a one-percent change in income Income elasticity = I I Slide 5-47
30 Other Elasticities of Demand (b) Cross rice Elasticity of Demand The amount by which the quantity demanded of one good changes in response to a one-percent change in the price of another good X X Cross - price elasticity = Y Y Slide 5-48
31 Other Elasticities of Demand (b) Cross rice Elasticity of Demand If the Cross-rice Elasticity is ositive then the commodities are Substitutes If the Cross-rice Elasticity is Negative then the commodities are Complements Slide 5-49
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