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Chapter 3
Demand Elasticity
Demand
as the
percentage change
in quantity
demanded of a given
good, relative to a
percentage change
in its price, all else
constant.
ep = %Qx %Px
P1
%P
P2
%Q
Q1
Q2
-0.55
Fish: -0.29
Neumans Own Pasta Sauce: -2.32
Orange juice: -1.39
|ep| > 1
Elasticity
definition
Elastic
demand
Relationship
among
variables
%Qd >
%Px
|ep| < 1
Inelastic
demand
%Qd <
%Px
UnitCopyright
or 2010 Pearson Education, Inc.
Impact on revenue
P1
P2
A
Y
P1
P2
A
Y
B
X
Q1
Q2
Q
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Q1 Q2
number of
substitute goods.
The percent of a
consumers income
that is spent on the
product.
The time period
under consideration.
9
10
percentage
change in the quantity
demanded of a given
good, X, relative to a
percentage change in
consumer income,
assuming all other
factors constant.
11
ei
= %Qx %I
Normal Good
Good
X is a normal
good if the demand
for good X moves in
the same direction as
a change in income.
Cream
Apples
ei = 1.32
Potatoes
12
ei = 1.72
ei = 0.15
Inferior Good
Good
X is an inferior
good if the demand
for good X moves in
the opposite direction
of a change in
income.
13
Chicken
ei = -0.106
percentage
change in the quantity
demanded of a given
good, X, relative to a
percentage change in
the price of good Y,
assuming all other
factors constant.
14
exy
= %Qx %Py
Substitutes
Two
goods with a
positive cross-price
elasticity of demand
coefficient are said to
be substitute goods.
Boiler
beef
exy = 0.20
Boiler
chickens and
pork
15
chickens and
exy = 0.28
Complements
If
16
Bread
and eggs
exy = -0.03
Demand Elasticities
Appendix 3A
Indifference Curves
A consumers
Y1
Y
Y2
U1
X
X1
X2
U2
20
21
The consumers
budget constraint
shows all the
combinations of two
goods that can be
purchased with a given
income and given the
prevailing prices of the
two goods.
Copyright 2010 Pearson Education, Inc.
Y1
B2
B1
22
Increase in income
Consumer Choice
23
The consumer
maximizes utility by
choosing a
combination of good X
and Y, lying on the
budget constraint and
simultaneously lying on
the indifference curve
furthest from the origin.
Copyright 2010 Pearson Education, Inc.
Increase in income
24
Increase in price