Econ 9e One Click ch05

PowerPoint Lectures for
Principles of Economics,
9e
; ;
By
CHAPTER 5 Elasticity
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
1 of 31
2 of 31
PART I INTRODUCTION TO ECONOMICS
Elasticity
Prepared by:
Fernando & Yvonn Quijano
PART I INTRODUCTION TO ECONOMICS
Elasticity
CHAPTER OUTLINE
Price Elasticity of Demand
Slope and Elasticity
Types of Elasticity
Calculating Elasticities
Calculating Percentage Changes
Elasticity Is a Ratio of Percentages
The Midpoint Formula
Elasticity Changes Along a Straight-Line
Demand Curve
Elasticity and Total Revenue
The Determinants of Demand Elasticity
Availability of Substitutes
The Importance of Being Unimportant
The Time Dimension
Other Important Elasticities
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Elasticity of Supply
Looking Ahead
Appendix: Point Elasticity
4 of 31
Elasticity
elasticity A general concept used to quantify the

response in one variable when another variable
changes.
%A
%B
elasticityofAwithrespecttoB
5 of 31
FIGURE the
5.1 unit
Slope
Not a Useful
Changing
ofIsmeasure
fromMeasure
poundsoftoResponsiveness
ounces changes the numerical value of
the demand slope dramatically, but the behavior of buyers in the two diagrams is
identical.
6 of 31

price elasticity of demand The ratio of the

percentage of change in quantity demanded to
the percentage of change in price; measures
the responsiveness of quantity demanded to
changes in price.
price elasticity of demand
% change in quantity demanded

% change in price
7 of 31

Types of Elasticity
TABLE 5.1 Hypothetical Demand Elasticities for Four Products

% Change In
Price
(% P)
% Change
In Quantity
Demanded
(% QD)
Insulin
+10%
0%
.0
Basic telephone service
+10%
-1%
-.1
Beef
+10%
-10%
-1.0
Unitarily elastic
Bananas
+10%
-30%
-3.0
Elastic
Product
Elasticity
(% QD %P)
Perfectly inelastic
Inelastic
perfectly inelastic demand Demand in which

quantity demanded does not respond at all to a
change in price.
8 of 31
Types of Elasticity
FIGURE 5.2 Perfectly Inelastic and Perfectly Elastic Demand Curves
Figure 5.2(a) shows a perfectly inelastic demand curve for insulin. Price elasticity of demand
is zero. Quantity demanded is fixed; it does not change at all when price changes.
Figure 5.2(b) shows a perfectly elastic demand curve facing a wheat farmer. A tiny price
increase drives the quantity demanded to zero. In essence, perfectly elastic demand implies
that individual producers can sell all they want at the going market price but cannot charge a
higher price.
9 of 31

Types of Elasticity
inelastic demand Demand that responds

somewhat, but not a great deal, to changes in
price. Inelastic demand always has a numerical
value between zero and -1.
A warning: You must be very careful about signs.

Because it is generally understood that demand
elasticities are negative (demand curves have a
negative slope), they are often reported and
discussed without the negative sign.
10 of 31

Types of Elasticity
unitary elasticity A demand relationship in which

the percentage change in quantity of a product
demanded is the same as the percentage change in
price in absolute value (a demand elasticity of -1).
elastic demand A demand relationship in which the
percentage change in quantity demanded is larger
than the percentage change in price in absolute
value (a demand elasticity with an absolute value
greater than 1).
perfectly elastic demand Demand in which
quantity drops to zero at the slightest increase in
price.
11 of 31

Types of Elasticity
A good way to remember the difference between

the two perfect elasticities is:
12 of 31
To calculate percentage change in quantity

demanded using the initial value as the base, the
following formula is used:
% changeinquantitydemanded
changeinquantitydemanded
x100%
Q
Q Q
x100%
Q
2
13 of 31
We can calculate the percentage change in price

in a similar way. Once again, let us use the initial
value of Pthat is, P1as the base for calculating
the percentage. By using P1 as the base, the
formula for calculating the percentage of change in
P is
changeinprice
%changeinprice
x100%
P
1
P P
x100%
P
2
14 of 31
Elasticity Is a Ratio of Percentages
Once all the changes in quantity demanded and

price have been converted to percentages,
calculating elasticity is a matter of simple division.
Recall the formal definition of elasticity:
%changeinquantitydemanded
%changeinprice
priceelasticityofdemand
15 of 31
midpoint formula A more precise way of

calculating percentages using the value halfway
between P1 and P2 for the base in calculating the
percentage change in price, and the value halfway
between Q1 and Q2 as the base for calculating the
percentage change in quantity demanded.
%changeinquantitydemanded
changeinquantitydemanded
x100%
(Q Q )/2
1
Q Q
x100%
(Q Q )/2
2
16 of 31
Using the point halfway between P1 and P2 as the

base for calculating the percentage change in
price, we get
%changeinprice
changeinprice
x100%
(P P )/2
P P
x100%
(P P )/2
2
17 of 31
18 of 31
Elasticity Changes Along a Straight-Line Demand Curve
TABLE 5.3 Demand Schedule

for Office Dining
Room Lunches
Price
(per
Lunch)
Quantity
Demanded
(Lunches per Month)
$11
10
9
8
7
6
5
4
3
2
1
0
0
2
4
6
8
10
12
14
16
18
20
22
FIGURE 5.3 Demand Curve for

Lunch at the Office Dining Room
Between points A and B, demand is quite elastic at -6.4.

Between points C and D, demand is quite inelastic at -.294.
19 of 31
In any market, P x Q is total revenue (TR) received

by producers:
TR = P x Q
total revenue = price x quantity
When price (P) declines, quantity demanded (QD)
increases. The two factors, P and QD move in
opposite directions:
Effects of price changes
on quantity demanded:
P QD
and
P QD
20 of 31
Because total revenue is the product of P and Q,

whether TR rises or falls in response to a price
increase depends on which is bigger: the
percentage increase in price or the percentage
decrease in quantity demanded.
Effects of price increase on

a product with inelastic demand:
P x QD TR
If the percentage decline in quantity demanded

following a price increase is larger than the
percentage increase in price, total revenue will fall.
Effects of price increase on
a product with inelastic demand:
P x QD TR
21 of 31
The opposite is true for a price cut. When demand

is elastic, a cut in price increases total revenues:
effect of price cut on a product

with elastic demand:
P x QD TR
When demand is inelastic, a cut in price reduces

total revenues:
effect of price cut on a product
with inelastic demand:
P x QD TR
22 of 31

Availability of Substitutes
Perhaps the most obvious factor affecting demand
elasticity is the availability of substitutes.
The Importance of Being Unimportant
When an item represents a relatively small part of
our total budget, we tend to pay little attention to its
price.
The Time Dimension

The elasticity of demand in the short run may be
very different from the elasticity of demand in the
long run. In the longer run, demand is likely to
become more elastic, or responsive, simply
because households make adjustments over time
and producers develop substitute goods.
23 of 31
Who Are the Elastic

Smokers?
Bill aims to raise tax on
cigarettes
Seattle Times
24 of 31
Elasticities at a
Delicatessen in the Short
Run and Long Run
The graph shows the expected
relationship between long-run
and short-run demand for
Franks sandwiches. Notice if
you raise prices above the
current level, the expected
quantity change read off the
short-run curve is less than that
from the long-run curve.
25 of 31

Income Elasticity of Demand
income elasticity of demand A measure of the

responsiveness of demand to changes in income.
% change in quantity demanded

% change in income
income elasticity of demand
26 of 31

Cross-Price Elasticity Of Demand
cross-price elasticity of demand A measure of

the response of the quantity of one good
demanded to a change in the price of another
good.
% change in quantity of Y demanded

cross - price elasticity of demand
% change in price of X
27 of 31

Elasticity Of Supply
elasticity of supply A measure of the response

of quantity of a good supplied to a change in price
of that good. Likely to be positive in output
markets.
%changeinquantitysupplied
elasticityofsupply
%changeinprice
28 of 31

Elasticity Of Supply
elasticity of labor supply A measure of the

response of labor supplied to a change in the price
of labor.
% change in quantity of labor supplied

% change in the wage rate
elasticity of labor supply
29 of 31
REVIEW TERMS AND CONCEPTS
inelastic demand
elastic demand
midpoint formula
elasticity
perfectly elastic demand
elasticity of labor supply
perfectly inelastic demand
elasticity of supply
price elasticity of demand
income elasticity of demand
unitary elasticity
cross-price elasticity of demand
30 of 31
APPENDIX
POINT ELASTICITY (OPTIONAL)
FIGURE 5A.1 Elasticity at a Point

Along a Demand Curve
Consider the straight-line

demand curve in Figure 5A.1.
We can write an expression for
elasticity at point C as follows:
Q
100
%Q
Q
elasticity
%P P 100
P
Q
Q1 Q P1
P
P Q1
P1
31 of 31
APPENDIX
Q/P is the reciprocal of the slope of the curve.
Slope in the diagram is constant along the curve,
and it is negative. To calculate the reciprocal of the
slope to plug into the previous electricity equation,
we take Q1B, or M1, and divide by minus the length
of line segment CQ1. Thus,
Q M 1
P CQ1
Since the length of CQ1 is equal to P1, we can

write:
Q M 1
P P1
By substituting we get:
M 1 P1 M 1 P1
M1
elasticity

P1 Q1 P1 M 2 M 2
32 of 31
APPENDIX
FIGURE 5A.2 Point

Elasticity Changes Along
a Demand Curve
33 of 31

Econ 9e One Click ch05

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Econ 9e One Click ch05

Uploaded by

Copyright:

Available Formats

PowerPoint Lectures for

PART I INTRODUCTION TO ECONOMICS

PART I INTRODUCTION TO ECONOMICS

elasticity A general concept used to quantify the

Price Elasticity of Demand

Slope and Elasticity

Price Elasticity of Demand

price elasticity of demand The ratio of the

price elasticity of demand

% change in quantity demanded

Price Elasticity of Demand

TABLE 5.1 Hypothetical Demand Elasticities for Four Products

Basic telephone service

perfectly inelastic demand Demand in which

Price Elasticity of Demand

FIGURE 5.2 Perfectly Inelastic and Perfectly Elastic Demand Curves

Price Elasticity of Demand

inelastic demand Demand that responds

A warning: You must be very careful about signs.

Price Elasticity of Demand

unitary elasticity A demand relationship in which

Price Elasticity of Demand

A good way to remember the difference between

To calculate percentage change in quantity

We can calculate the percentage change in price

Once all the changes in quantity demanded and

midpoint formula A more precise way of

Using the point halfway between P1 and P2 as the

The Midpoint Formula

TABLE 5.3 Demand Schedule

FIGURE 5.3 Demand Curve for

Between points A and B, demand is quite elastic at -6.4.

In any market, P x Q is total revenue (TR) received

Because total revenue is the product of P and Q,

Effects of price increase on

If the percentage decline in quantity demanded

The opposite is true for a price cut. When demand

effect of price cut on a product

When demand is inelastic, a cut in price reduces

The Determinants of Demand Elasticity

The Time Dimension

The Determinants of Demand Elasticity

Who Are the Elastic

The Determinants of Demand Elasticity

Other Important Elasticities

income elasticity of demand A measure of the

% change in quantity demanded

income elasticity of demand

Other Important Elasticities

cross-price elasticity of demand A measure of

% change in quantity of Y demanded

Other Important Elasticities

elasticity of supply A measure of the response

Other Important Elasticities

elasticity of labor supply A measure of the

% change in quantity of labor supplied

elasticity of labor supply

REVIEW TERMS AND CONCEPTS

perfectly elastic demand

elasticity of labor supply

perfectly inelastic demand

price elasticity of demand