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Time: 90 Minutes
Slides: 35
Elasticity
Session 03
Elasticity: Concepts and Applications
Part I: Motivation
Part II: Elasticity - Definitions and Concepts
Arc versus Point Elasticity
Exact Formula of Elasticity at a Point on a Curve
Taxonomy and Terminologies
Elasticities of Individual Items and Item Groups
Short-run versus Long-run Elasticity
Part III: A Very Brief Case Study
Part IV: Illustrative Questions
Typical features:
Slope
Curvature
Other Examples
By what percentage will my sales change if I increase my
advertising expenditure in television by 10.0 per cent?
Murder and the probability of capital punishment (Reference: A
study by Ehlrich in American Economic Review, June 1975)
Infinitely Elastic Demand: Principle that consumers will buy as much of a good
as they can get at a single price, but for any higher price the quantity demanded
drops to zero, while for any lower price the quantity demanded increases without
limit.
12/16/2017 3:18 AM KB: ME, Session 03, Term I 13 of 35
Extreme Cases:
[b] Zero Elasticity (Completely Inelastic)
Completely Inelastic
Demand: Principle that
consumers will buy a fixed
quantity of a good
regardless of its price.
Sign: Positive.
Interpretation
Determinants of elasticity of supply
How easily can producers shift to other
products?
How costs respond to output changes?
Examples:
Food
A Product with a high brand value
Can you compute (i) the own-price elasticity of demand for Times, (ii)
relevant cross-price elasticities of demand for Guardian, Telegraph and
Independent?
How do you ensure that the ceteris paribus assumption has been met
here, although approximately?
Implications?
What do you expect would happen to the sales of The Financial
Times?
Why did The Times adopt a strategy of price cut?
(a) What are the price elasticities of the demand curve and
the supply curves at the points P = 1, 2, 3
What happens
when B
approaches A or
vice versa?
Additional References:
Craig A. Gallet and John A. List, 1998: Elasticities of Beer Demand
Revisited, Economics Letters, 61, 6771.
Other references as cited in text.
Read:
Chapters 3 and 4 of Pindyck and Rubinfeld.
Be familiar with concepts like marginal and
diminishing / increasing marginal
When you share your wealth with others, your own wealth shrinks.
When you share your knowledge with others, your own knowledge increases.
~ Chanaky