MB MC
Chapter 4,Elasticity Slide 1
Lecture 10 (2005.10.18)
Class today:
Chapter 3,review question and choices
Recap Part 1
Preview Part 2
Chapter 4,p91~100
MB MC
Chapter 4,Elasticity Slide 2
Review Part 1 Introduction
Chapter 1 Thinking Like an Economist
Chapter 2 Comparative Advantage
Chapter 3 Supply and Demand,An
Introduction
MB MC
Chapter 4,Elasticity Slide 3
Part 2 Competition and the Invisible Hand
Chapter 4 Elasticity
Chapter 5 Demand,The benefit side of
the market
Chapter 6 Perfectly Competitive Supply,
The cost side of the market
Chapter 7 Efficiency and Exchange
Chapter 8 The Quest for Profit and the
Invisible Hand
MB MC
Chapter 4,Elasticity Slide 4
Part 2,Competition and the Invisible Hand
Part II uses an extended treatment of markets to
present the ideas of competition and the invisible
hand,The chapters go into greater detail as to
what lies behind the demand and supply curves
introduced in Chapter 3,The demand curve is
used to introduce important concepts including
elasticity,utility,and consumer surplus,Chapter
6 presents costs and producer surplus so that
efficiency and the invisible hand process can be
considered in Chapters 7 and 8,
MB MC
Elasticity
MB MC
Chapter 4,Elasticity Slide 6
Overview 1
Chapter 4 introduces the concept of elasticity
(including price elasticity of demand,income
elasticity,cross-price elasticity,and price elasticity
of supply),It presents elasticity as an extension of
the supply and demand model presented in
Chapter 3,The effects of price elasticity of
demand on total revenue and total expenditures is
discussed and explored graphically.
MB MC
Chapter 4,Elasticity Slide 7
Overview 2
The chapter discusses the interpretation of
cross-price elasticity and income elasticity
in terms of what they tell us about people’s
preferences for various goods,Finally,the
chapter investigates price elasticity of
supply and how it can be used to investigate
firms’ production processes.
MB MC
Chapter 4,Elasticity Slide 8
Elasticity
What do you think?
Could reducing the
supply of illegal
drugs cause an
increase in drug-
related burglaries?
MB MC
Chapter 4,Elasticity Slide 9
The Effect of Extra Border
Patrols on the Market for Illicit Drugs
Q(1,000s of ounces/day)
P($
/o
un
ce
)
50
50
S
D
80
40
S’
Total Expenditure = P x Q
S $2500 = $50 x 50
S’ $3200 = $80 x 40
MB MC
Chapter 4,Elasticity Slide 10
Elasticity
Elasticity
A measure of the extent to which quantity
demanded and quantity supplied respond
to variations in price,income,and other
factors.
MB MC
Chapter 4,Elasticity Slide 11
Price Elasticity of Demand
Defined
Generally
A measure of the responsiveness of the
quantity demanded of a good to a change in
the price of that good
Formally
The percentage change in the quantity
demanded that results from a 1 percent change
in its price
MB MC
Chapter 4,Elasticity Slide 12
Price Elasticity of Demand
Measuring Price Elasticity of Demand
P r ic e in C h a n g e P e r c e n t a g e
D e m a n d e dQ u a n t it y in C h a n g e P e r c e n t a g e
MB MC
Chapter 4,Elasticity Slide 13
Assume
The price of pork falls by 2% and the
quantity demanded increases by 6%
Then the price elasticity of demand for pork is
Price Elasticity of Demand
3
2
6
MB MC
Chapter 4,Elasticity Slide 14
Price Elasticity of Demand
Measuring Price Elasticity of Demand
Observations
Price elasticity of demand will always be
negative (i.e.,an inverse relationship
between price and quantity)
For convenience we drop the negative sign
P r ic e in C h a n g e P e r c e n t a g e
D e m a n d e dQ u a n t it y in C h a n g e P e r c e n t a g e
MB MC
Chapter 4,Elasticity Slide 15
Price Elasticity of Demand
Measuring Price Elasticity of Demand
When is
> 1,elastic
< 1,inelastic
= 1,unit elastic
P r ic e in C h a n g e P e r c e n t a g e
D e m a n d e dQ u a n t it y in C h a n g e P e r c e n t a g e
MB MC
Chapter 4,Elasticity Slide 16
Elastic and Inelastic Demand
3
Price elasticity
of demand
Inelastic
Unit elastic
Elastic
210
necessities Luxuries
MB MC
Chapter 4,Elasticity Slide 17
Price Elasticity of Demand
What is the elasticity of demand for pizza?
Originally
Price = $1/slice
Quantity demanded = 400 slices/day
New
Price = $0.97/slice
Quantity demanded = 404 slices/day,then
I n e la s t ic,31P r ic e in C h a n g e % Q u a n t it y in C h a n g e %?
Example 4.1
MB MC
Chapter 4,Elasticity Slide 18
Price Elasticity of Demand
What is the elasticity of season ski passes?
Originally
Price = $400
Quantity demanded = 10,000 passes/year
New
Price = $380
Quantity demanded = 12,000 passes/year,then
E l a s t ic,520P r ic e in C h a n g e % Q u a n t it y in C h a n g e %?
Exercises 4.1
MB MC
Chapter 4,Elasticity Slide 19
Price Elasticity of Demand
Determinants of Price Elasticity of
Demand
Substitution Possibilities
Budget Share
Time
MB MC
Chapter 4,Elasticity Slide 20
Price Elasticity
Estimates for Selected Products
Good or service Price elasticity
Green peas 2.80
Restaurant meals 1.63
Automobiles 1.35
Electricity 1.20
Beer 1.19
Movies 0.87
Air travel (foreign) 0.77
Shoes 0.70
Coffee 0.25
Theater,opera 0.18
MB MC
Chapter 4,Elasticity Slide 21
Price Elasticity of Demand
Economic Naturalist
Will higher taxes on cigarettes curb
teenage smoking?
Why was the luxury tax on yachts such a
disaster?
MB MC
Chapter 4,Elasticity Slide 22
A Graphical Interpretation of Price Elasticity
For small changes in price
PΔP
QΔQ e la s t ic it y P r ic e
Where Q is the original quantity and P is the original
price
MB MC
Chapter 4,Elasticity Slide 23
A Graphical Interpretation of Price Elasticity
Example
Originally
Price (P) = $100
Quantity (Q) = 20
New
Price (P) = $105
Quantity (Q) = 15
E la s t ic:55251005 205
MB MC
Chapter 4,Elasticity Slide 24
A Graphical Interpretation
of Price Elasticity of Demand
Quantity
Pr
ice
P
D
A
Q
P - P
Q + Q
Q
P
sl o p eQP A 1 at e l a st i ci t y i cePr
MB MC
Chapter 4,Elasticity Slide 25
Calculating Price Elasticity of Demand
20
Quantity
Pr
ice
1
D
A
2 3 4 5
16
12
8
4
4520i n t e r c e p t h o r i z o n t a li n t e r c e p t v e r t i c a ls l o p e
3
2
12
8
4
1x
3
8
A
MB MC
Chapter 4,Elasticity Slide 26
Calculating Price Elasticity of Demand
20
Quantity
Pr
ice
1 2 3 4 5
16
12
8
4
D
A
Question
What is the price elasticity
of demand when P = $4?
MB MC
Chapter 4,Elasticity Slide 27
D1
D2
12
4 6 12
6
4
Price Elasticity and the Steepness of the
Demand Curve
Quantity
Pr
ice
What is the price elasticity of
demand when P = $4?
2
1
612
1
4
4
1D
2
126
1
4
4
2D
MB MC
Chapter 4,Elasticity Slide 28
Price Elasticity and the Steepness of the
Demand Curve
12
Quantity
Pr
ice
D1
D2
4 6 10 12
6
4
1
Observation
If two demand curves have a
point in common,the steeper
curve must be less elastic with
respect to price at that point
MB MC
Chapter 4,Elasticity Slide 29
12
D1
D2
4 6 10 12
6
4
1
For D2 when P = $1
Price Elasticity and the Steepness of the
Demand Curve
Quantity
Pr
ice 5
1
126
1
10
1
2D
MB MC
Chapter 4,Elasticity Slide 30
Price Elasticity Regions along a Straight-Line
Demand Curve
Quantity
Pr
ice
b/2
a/2
a
b
1
1
1
Observation
Price elasticity varies at
every point along a straight-
line demand curve
MB MC
Chapter 4,Elasticity Slide 31
MB MC
Chapter 4,Elasticity Slide 32
Lecture 11 (2005.10.20)
CLASS TODAY
Recap lecture 10
Chapter 4
P99-109
MB MC
Chapter 4,Elasticity Slide 33
RECAP 1
Elasticity
Price Elasticity of
Demand
P
P
Q
Q
E
D?
MB MC
Chapter 4,Elasticity Slide 34
RECAP 2
3
Price elasticity
of demand
Inelastic
Unit elastic
Elastic
210
1,Substitution possibilities
2,Budget share
3,Time
MB MC
Chapter 4,Elasticity Slide 35
Recap 3
Quantity
Pr
ice
P
D
A
Q
P - P
Q + Q
Q
P
sl o p eQP A 1 at e l a st i ci t y i cePr
MB MC
Chapter 4,Elasticity Slide 36
Recap 4
Quantity
Pr
ice
b/2
a/2
a
b
1
1
1
Observation
Price elasticity varies at
every point along a straight-
line demand curve
MB MC
Chapter 4,Elasticity Slide 37
Perfectly Elastic Demand Curve
Quantity
Pr
ice
) y ( e la s t ic it d e m a n d
e la s t ic P e r fe c t ly
MB MC
Chapter 4,Elasticity Slide 38
Perfectly Inelastic Demand Curve
Quantity
Pr
ice
)0 y ( e la s t ic it d e m a n d
in e la s t icPe r fe c t ly
MB MC
Chapter 4,Elasticity Slide 39
Elasticity and Total Expenditure
Total Expenditure = P x Q
Market demand measures the quantity (Q)
at each price (P)
Total Expenditure = Total Revenue
MB MC
Chapter 4,Elasticity Slide 40
D
A
Total Expenditure
= $1,000/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 41
D
B
Total Expenditure
= $1,600/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 42
Elasticity and Total Expenditure
Observation
From A to B,the total revenue have raised
from $ 1000/day to $ 1600/day.
What do you think?
Will increasing the market price always increase
total revenue?
MB MC
Chapter 4,Elasticity Slide 43
D Total Expenditure= $1,600/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 44
D
Total Expenditure
= $1,000/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 45
Elasticity and Total Expenditure
General Rule
A price increase will increase total revenue
when the % change in P is greater than the
% change in Q.
MB MC
Chapter 4,Elasticity Slide 46
Elasticity
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
Example 4.3 For the demand curve,draw a
separate graph showing how total
expenditure varies with the price of
movie tickets.
MB MC
Chapter 4,Elasticity Slide 47
Total Expenditure as a Function of Price
Price ($/ticket) Total expenditure ($/day)
12 0
10 1,000
8 1,600
6 1,800
4 1,600
2 1,000
0 0
MB MC
Chapter 4,Elasticity Slide 48
Total Expenditure as a Function of Price
1,800
Price ($/ticket)
To
tal
ex
pe
nd
itu
re
($
/da
y)
2 6 8 10 12
1,600
1,000
0 4
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
Total revenue is at a maximum at the
midpoint on a straight-line demand curve
MB MC
Chapter 4,Elasticity Slide 49
Elasticity and Total Expenditure
Rule
When price elasticity is greater than 1,
changes in price and changes in total
expenditures always move in opposite
directions.
When price elasticity is less than 1,changes
in price and changes in total expenditures
always move in the same direction.
MB MC
Chapter 4,Elasticity Slide 50
Elasticity and Total Expenditure
What do you think?
Should a rock band raise or lower its price
to increase total revenue?
Assume
3
0 0 05Q
20P
,
$
MB MC
Chapter 4,Elasticity Slide 51
Elasticity and Total Expenditure
What do you think?
Should a rock band raise or lower its price to
increase total revenue?
Then
Total revenue = $20 x 5,000 = $100,000/week
If P is increased 10%,Q will decrease 30%
Total revenue = $22 x 3,500 = $77,000/week
If P is lowered 10%,Q will increase 30%
Total revenue = $18 x 6,500 = $177,000/week
MB MC
Chapter 4,Elasticity Slide 52
Exercises
Review questions 3 (p114)
Problems 3 (p115)
5 (p115)
MB MC
Chapter 4,Elasticity Slide 53
Elasticity and Total Expenditure
Cross-Price Elasticity of Demand
The percentage by which quantity demanded
of the first good changes in response to a 1
percent change in the price of the second
good
Substitute Goods
When the cross-price elasticity of demand is
positive
Complement Goods
When the cross-price elasticity of demand is
negative
MB MC
Chapter 4,Elasticity Slide 54
Elasticity and Total Expenditure
Income Elasticity of Demand
The percentage by which quantity
demanded changes in response to a 1
percent change in income
Normal Goods
Income elasticity is positive
Inferior Goods
Income elasticity is negative
MB MC
Chapter 4,Elasticity Slide 55
The Price Elasticity of Supply
Price Elasticity of Supply
The percentage change in the quantity
supplied that occurs in response to a 1
percent change in price
PP
QQ s u p p ly of e la s t ic it y Pr ic e
sl o p e
1
Q
P su p p l y of e l a st i ci t y P r i ce
MB MC
Chapter 4,Elasticity Slide 56
15
5
B
P
Q
1515155 B
S
12
4 A
1412124 A
Calculating the Price Elasticity of Supply
Graphically
Quantity
Pr
ice
0
MB MC
Chapter 4,Elasticity Slide 57
2
4
2
A
2224 A
3
5 B
35135 B
A Supply Curve for Which Price Elasticity
Declines as Quantity Rises
Quantity
Pr
ice
0
S
MB MC
Chapter 4,Elasticity Slide 58
A Perfectly Inelastic Supply Curve
Quantity of land in Manhattan
(1,000s of acres)
Pr
ice
($
/ac
re
)
0
S
Elasticity = 0 at every
point along a vertical
supply curve
What is the price elasticity of supply of land
within the borough limits of Manhattan?
Example 4.4
MB MC
Chapter 4,Elasticity Slide 59
Quantity of lemonade
(cups/day)
Pr
ice
(c
en
ts
/cu
p)
0
14 S
If MC is constant,then the
price elasticity of supply at every point
along a horizontal supply curve is infinite
What is the price elasticity of supply of lemonade?
A Perfectly Elastic Supply Curve
Example 4.5
MB MC
Chapter 4,Elasticity Slide 60
Homework
Problems 2 (p115)
Preview,p109-113
MB MC
Chapter 4,Elasticity Slide 61
Lecture 12 (2005.10.25)
CLASS TODAY
1,Chapter 4
P109-113
2,Review key
terms
3,Exercises
MB MC
Chapter 4,Elasticity Slide 62
Determinants of Supply Elasticity
Flexibility of inputs
Mobility of inputs
Ability to produce substitute inputs
Time
The Price Elasticity of Supply
MB MC
Chapter 4,Elasticity Slide 63
Economic Naturalist
Why are gasoline prices so much more
volatile than car prices?
Differences in markets
o Demand for gasoline is more inelastic
o Gasoline market has larger and more frequent
supply shifts
The Price Elasticity of Supply
MB MC
Chapter 4,Elasticity Slide 64
Greater Volatility in Gasoline Prices than in
Car Prices
Quantity
(millions of gallons/day)
Pr
ice
($
/g
all
on
)
0 6
1.69
S’
D
1.02
7.2
S
Gasoline E=0.30
MB MC
Chapter 4,Elasticity Slide 65
Greater Volatility in Gasoline Prices than in
Car Prices
Pr
ice
($
1,0
00
s/c
ar
)
D
17
S’
11
Quantity
(1,000s of cars/day)
Cars
16.4
12
S
Cars E=2.48
MB MC
Chapter 4,Elasticity Slide 66
The Price Elasticity of Supply
What do you think?
How would elasticity
of supply and
fluctuating demand
impact price volatility?
MB MC
Chapter 4,Elasticity Slide 67
Review key terms of chapter 4 (1)
Price elasticity of demand
Elastic
Inelastic
Unit elastic 0 1
Perfectly inelastic demand
(E=0)
Perfectly elastic demand
(E=infinite)
P
P
Q
Q
E D
p
Q
MB MC
Chapter 4,Elasticity Slide 68
Review key terms of chapter 4 (2)
MB MC
Chapter 4,Elasticity Slide 69
Review key terms of chapter 4 (3)
Cross-price elasticity of demand
substitute goods
complement goods
Income elasticity of demand
normal goods
inferior goods
00
2
2
1
1
P
P
Q
Q
E
00
I
I
Q
Q
E I
MB MC
Chapter 4,Elasticity Slide 70
Review key terms of chapter 4 (4)
Total revenue = P X Q
Total expenditure = P X Q
MB MC
Chapter 4,Elasticity Slide 71
Review key terms of chapter 4 (5)
Price elasticity of supply
Perfectly elastic supply (E=infinite)
Perfectly inelastic supply (E=0)
P
P
Q
Q
E D
P
Q
MB MC
End of
Chapter
Chapter 4,Elasticity Slide 1
Lecture 10 (2005.10.18)
Class today:
Chapter 3,review question and choices
Recap Part 1
Preview Part 2
Chapter 4,p91~100
MB MC
Chapter 4,Elasticity Slide 2
Review Part 1 Introduction
Chapter 1 Thinking Like an Economist
Chapter 2 Comparative Advantage
Chapter 3 Supply and Demand,An
Introduction
MB MC
Chapter 4,Elasticity Slide 3
Part 2 Competition and the Invisible Hand
Chapter 4 Elasticity
Chapter 5 Demand,The benefit side of
the market
Chapter 6 Perfectly Competitive Supply,
The cost side of the market
Chapter 7 Efficiency and Exchange
Chapter 8 The Quest for Profit and the
Invisible Hand
MB MC
Chapter 4,Elasticity Slide 4
Part 2,Competition and the Invisible Hand
Part II uses an extended treatment of markets to
present the ideas of competition and the invisible
hand,The chapters go into greater detail as to
what lies behind the demand and supply curves
introduced in Chapter 3,The demand curve is
used to introduce important concepts including
elasticity,utility,and consumer surplus,Chapter
6 presents costs and producer surplus so that
efficiency and the invisible hand process can be
considered in Chapters 7 and 8,
MB MC
Elasticity
MB MC
Chapter 4,Elasticity Slide 6
Overview 1
Chapter 4 introduces the concept of elasticity
(including price elasticity of demand,income
elasticity,cross-price elasticity,and price elasticity
of supply),It presents elasticity as an extension of
the supply and demand model presented in
Chapter 3,The effects of price elasticity of
demand on total revenue and total expenditures is
discussed and explored graphically.
MB MC
Chapter 4,Elasticity Slide 7
Overview 2
The chapter discusses the interpretation of
cross-price elasticity and income elasticity
in terms of what they tell us about people’s
preferences for various goods,Finally,the
chapter investigates price elasticity of
supply and how it can be used to investigate
firms’ production processes.
MB MC
Chapter 4,Elasticity Slide 8
Elasticity
What do you think?
Could reducing the
supply of illegal
drugs cause an
increase in drug-
related burglaries?
MB MC
Chapter 4,Elasticity Slide 9
The Effect of Extra Border
Patrols on the Market for Illicit Drugs
Q(1,000s of ounces/day)
P($
/o
un
ce
)
50
50
S
D
80
40
S’
Total Expenditure = P x Q
S $2500 = $50 x 50
S’ $3200 = $80 x 40
MB MC
Chapter 4,Elasticity Slide 10
Elasticity
Elasticity
A measure of the extent to which quantity
demanded and quantity supplied respond
to variations in price,income,and other
factors.
MB MC
Chapter 4,Elasticity Slide 11
Price Elasticity of Demand
Defined
Generally
A measure of the responsiveness of the
quantity demanded of a good to a change in
the price of that good
Formally
The percentage change in the quantity
demanded that results from a 1 percent change
in its price
MB MC
Chapter 4,Elasticity Slide 12
Price Elasticity of Demand
Measuring Price Elasticity of Demand
P r ic e in C h a n g e P e r c e n t a g e
D e m a n d e dQ u a n t it y in C h a n g e P e r c e n t a g e
MB MC
Chapter 4,Elasticity Slide 13
Assume
The price of pork falls by 2% and the
quantity demanded increases by 6%
Then the price elasticity of demand for pork is
Price Elasticity of Demand
3
2
6
MB MC
Chapter 4,Elasticity Slide 14
Price Elasticity of Demand
Measuring Price Elasticity of Demand
Observations
Price elasticity of demand will always be
negative (i.e.,an inverse relationship
between price and quantity)
For convenience we drop the negative sign
P r ic e in C h a n g e P e r c e n t a g e
D e m a n d e dQ u a n t it y in C h a n g e P e r c e n t a g e
MB MC
Chapter 4,Elasticity Slide 15
Price Elasticity of Demand
Measuring Price Elasticity of Demand
When is
> 1,elastic
< 1,inelastic
= 1,unit elastic
P r ic e in C h a n g e P e r c e n t a g e
D e m a n d e dQ u a n t it y in C h a n g e P e r c e n t a g e
MB MC
Chapter 4,Elasticity Slide 16
Elastic and Inelastic Demand
3
Price elasticity
of demand
Inelastic
Unit elastic
Elastic
210
necessities Luxuries
MB MC
Chapter 4,Elasticity Slide 17
Price Elasticity of Demand
What is the elasticity of demand for pizza?
Originally
Price = $1/slice
Quantity demanded = 400 slices/day
New
Price = $0.97/slice
Quantity demanded = 404 slices/day,then
I n e la s t ic,31P r ic e in C h a n g e % Q u a n t it y in C h a n g e %?
Example 4.1
MB MC
Chapter 4,Elasticity Slide 18
Price Elasticity of Demand
What is the elasticity of season ski passes?
Originally
Price = $400
Quantity demanded = 10,000 passes/year
New
Price = $380
Quantity demanded = 12,000 passes/year,then
E l a s t ic,520P r ic e in C h a n g e % Q u a n t it y in C h a n g e %?
Exercises 4.1
MB MC
Chapter 4,Elasticity Slide 19
Price Elasticity of Demand
Determinants of Price Elasticity of
Demand
Substitution Possibilities
Budget Share
Time
MB MC
Chapter 4,Elasticity Slide 20
Price Elasticity
Estimates for Selected Products
Good or service Price elasticity
Green peas 2.80
Restaurant meals 1.63
Automobiles 1.35
Electricity 1.20
Beer 1.19
Movies 0.87
Air travel (foreign) 0.77
Shoes 0.70
Coffee 0.25
Theater,opera 0.18
MB MC
Chapter 4,Elasticity Slide 21
Price Elasticity of Demand
Economic Naturalist
Will higher taxes on cigarettes curb
teenage smoking?
Why was the luxury tax on yachts such a
disaster?
MB MC
Chapter 4,Elasticity Slide 22
A Graphical Interpretation of Price Elasticity
For small changes in price
PΔP
QΔQ e la s t ic it y P r ic e
Where Q is the original quantity and P is the original
price
MB MC
Chapter 4,Elasticity Slide 23
A Graphical Interpretation of Price Elasticity
Example
Originally
Price (P) = $100
Quantity (Q) = 20
New
Price (P) = $105
Quantity (Q) = 15
E la s t ic:55251005 205
MB MC
Chapter 4,Elasticity Slide 24
A Graphical Interpretation
of Price Elasticity of Demand
Quantity
Pr
ice
P
D
A
Q
P - P
Q + Q
Q
P
sl o p eQP A 1 at e l a st i ci t y i cePr
MB MC
Chapter 4,Elasticity Slide 25
Calculating Price Elasticity of Demand
20
Quantity
Pr
ice
1
D
A
2 3 4 5
16
12
8
4
4520i n t e r c e p t h o r i z o n t a li n t e r c e p t v e r t i c a ls l o p e
3
2
12
8
4
1x
3
8
A
MB MC
Chapter 4,Elasticity Slide 26
Calculating Price Elasticity of Demand
20
Quantity
Pr
ice
1 2 3 4 5
16
12
8
4
D
A
Question
What is the price elasticity
of demand when P = $4?
MB MC
Chapter 4,Elasticity Slide 27
D1
D2
12
4 6 12
6
4
Price Elasticity and the Steepness of the
Demand Curve
Quantity
Pr
ice
What is the price elasticity of
demand when P = $4?
2
1
612
1
4
4
1D
2
126
1
4
4
2D
MB MC
Chapter 4,Elasticity Slide 28
Price Elasticity and the Steepness of the
Demand Curve
12
Quantity
Pr
ice
D1
D2
4 6 10 12
6
4
1
Observation
If two demand curves have a
point in common,the steeper
curve must be less elastic with
respect to price at that point
MB MC
Chapter 4,Elasticity Slide 29
12
D1
D2
4 6 10 12
6
4
1
For D2 when P = $1
Price Elasticity and the Steepness of the
Demand Curve
Quantity
Pr
ice 5
1
126
1
10
1
2D
MB MC
Chapter 4,Elasticity Slide 30
Price Elasticity Regions along a Straight-Line
Demand Curve
Quantity
Pr
ice
b/2
a/2
a
b
1
1
1
Observation
Price elasticity varies at
every point along a straight-
line demand curve
MB MC
Chapter 4,Elasticity Slide 31
MB MC
Chapter 4,Elasticity Slide 32
Lecture 11 (2005.10.20)
CLASS TODAY
Recap lecture 10
Chapter 4
P99-109
MB MC
Chapter 4,Elasticity Slide 33
RECAP 1
Elasticity
Price Elasticity of
Demand
P
P
Q
Q
E
D?
MB MC
Chapter 4,Elasticity Slide 34
RECAP 2
3
Price elasticity
of demand
Inelastic
Unit elastic
Elastic
210
1,Substitution possibilities
2,Budget share
3,Time
MB MC
Chapter 4,Elasticity Slide 35
Recap 3
Quantity
Pr
ice
P
D
A
Q
P - P
Q + Q
Q
P
sl o p eQP A 1 at e l a st i ci t y i cePr
MB MC
Chapter 4,Elasticity Slide 36
Recap 4
Quantity
Pr
ice
b/2
a/2
a
b
1
1
1
Observation
Price elasticity varies at
every point along a straight-
line demand curve
MB MC
Chapter 4,Elasticity Slide 37
Perfectly Elastic Demand Curve
Quantity
Pr
ice
) y ( e la s t ic it d e m a n d
e la s t ic P e r fe c t ly
MB MC
Chapter 4,Elasticity Slide 38
Perfectly Inelastic Demand Curve
Quantity
Pr
ice
)0 y ( e la s t ic it d e m a n d
in e la s t icPe r fe c t ly
MB MC
Chapter 4,Elasticity Slide 39
Elasticity and Total Expenditure
Total Expenditure = P x Q
Market demand measures the quantity (Q)
at each price (P)
Total Expenditure = Total Revenue
MB MC
Chapter 4,Elasticity Slide 40
D
A
Total Expenditure
= $1,000/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 41
D
B
Total Expenditure
= $1,600/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 42
Elasticity and Total Expenditure
Observation
From A to B,the total revenue have raised
from $ 1000/day to $ 1600/day.
What do you think?
Will increasing the market price always increase
total revenue?
MB MC
Chapter 4,Elasticity Slide 43
D Total Expenditure= $1,600/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 44
D
Total Expenditure
= $1,000/day
The Demand Curve for Movie Tickets
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
MB MC
Chapter 4,Elasticity Slide 45
Elasticity and Total Expenditure
General Rule
A price increase will increase total revenue
when the % change in P is greater than the
% change in Q.
MB MC
Chapter 4,Elasticity Slide 46
Elasticity
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
Example 4.3 For the demand curve,draw a
separate graph showing how total
expenditure varies with the price of
movie tickets.
MB MC
Chapter 4,Elasticity Slide 47
Total Expenditure as a Function of Price
Price ($/ticket) Total expenditure ($/day)
12 0
10 1,000
8 1,600
6 1,800
4 1,600
2 1,000
0 0
MB MC
Chapter 4,Elasticity Slide 48
Total Expenditure as a Function of Price
1,800
Price ($/ticket)
To
tal
ex
pe
nd
itu
re
($
/da
y)
2 6 8 10 12
1,600
1,000
0 4
12
Quantity (100s of tickets/day)
Pr
ice
($
/tic
ke
t)
1 3 4 5 6
10
8
6
4
2
0 2
Total revenue is at a maximum at the
midpoint on a straight-line demand curve
MB MC
Chapter 4,Elasticity Slide 49
Elasticity and Total Expenditure
Rule
When price elasticity is greater than 1,
changes in price and changes in total
expenditures always move in opposite
directions.
When price elasticity is less than 1,changes
in price and changes in total expenditures
always move in the same direction.
MB MC
Chapter 4,Elasticity Slide 50
Elasticity and Total Expenditure
What do you think?
Should a rock band raise or lower its price
to increase total revenue?
Assume
3
0 0 05Q
20P
,
$
MB MC
Chapter 4,Elasticity Slide 51
Elasticity and Total Expenditure
What do you think?
Should a rock band raise or lower its price to
increase total revenue?
Then
Total revenue = $20 x 5,000 = $100,000/week
If P is increased 10%,Q will decrease 30%
Total revenue = $22 x 3,500 = $77,000/week
If P is lowered 10%,Q will increase 30%
Total revenue = $18 x 6,500 = $177,000/week
MB MC
Chapter 4,Elasticity Slide 52
Exercises
Review questions 3 (p114)
Problems 3 (p115)
5 (p115)
MB MC
Chapter 4,Elasticity Slide 53
Elasticity and Total Expenditure
Cross-Price Elasticity of Demand
The percentage by which quantity demanded
of the first good changes in response to a 1
percent change in the price of the second
good
Substitute Goods
When the cross-price elasticity of demand is
positive
Complement Goods
When the cross-price elasticity of demand is
negative
MB MC
Chapter 4,Elasticity Slide 54
Elasticity and Total Expenditure
Income Elasticity of Demand
The percentage by which quantity
demanded changes in response to a 1
percent change in income
Normal Goods
Income elasticity is positive
Inferior Goods
Income elasticity is negative
MB MC
Chapter 4,Elasticity Slide 55
The Price Elasticity of Supply
Price Elasticity of Supply
The percentage change in the quantity
supplied that occurs in response to a 1
percent change in price
PP
QQ s u p p ly of e la s t ic it y Pr ic e
sl o p e
1
Q
P su p p l y of e l a st i ci t y P r i ce
MB MC
Chapter 4,Elasticity Slide 56
15
5
B
P
Q
1515155 B
S
12
4 A
1412124 A
Calculating the Price Elasticity of Supply
Graphically
Quantity
Pr
ice
0
MB MC
Chapter 4,Elasticity Slide 57
2
4
2
A
2224 A
3
5 B
35135 B
A Supply Curve for Which Price Elasticity
Declines as Quantity Rises
Quantity
Pr
ice
0
S
MB MC
Chapter 4,Elasticity Slide 58
A Perfectly Inelastic Supply Curve
Quantity of land in Manhattan
(1,000s of acres)
Pr
ice
($
/ac
re
)
0
S
Elasticity = 0 at every
point along a vertical
supply curve
What is the price elasticity of supply of land
within the borough limits of Manhattan?
Example 4.4
MB MC
Chapter 4,Elasticity Slide 59
Quantity of lemonade
(cups/day)
Pr
ice
(c
en
ts
/cu
p)
0
14 S
If MC is constant,then the
price elasticity of supply at every point
along a horizontal supply curve is infinite
What is the price elasticity of supply of lemonade?
A Perfectly Elastic Supply Curve
Example 4.5
MB MC
Chapter 4,Elasticity Slide 60
Homework
Problems 2 (p115)
Preview,p109-113
MB MC
Chapter 4,Elasticity Slide 61
Lecture 12 (2005.10.25)
CLASS TODAY
1,Chapter 4
P109-113
2,Review key
terms
3,Exercises
MB MC
Chapter 4,Elasticity Slide 62
Determinants of Supply Elasticity
Flexibility of inputs
Mobility of inputs
Ability to produce substitute inputs
Time
The Price Elasticity of Supply
MB MC
Chapter 4,Elasticity Slide 63
Economic Naturalist
Why are gasoline prices so much more
volatile than car prices?
Differences in markets
o Demand for gasoline is more inelastic
o Gasoline market has larger and more frequent
supply shifts
The Price Elasticity of Supply
MB MC
Chapter 4,Elasticity Slide 64
Greater Volatility in Gasoline Prices than in
Car Prices
Quantity
(millions of gallons/day)
Pr
ice
($
/g
all
on
)
0 6
1.69
S’
D
1.02
7.2
S
Gasoline E=0.30
MB MC
Chapter 4,Elasticity Slide 65
Greater Volatility in Gasoline Prices than in
Car Prices
Pr
ice
($
1,0
00
s/c
ar
)
D
17
S’
11
Quantity
(1,000s of cars/day)
Cars
16.4
12
S
Cars E=2.48
MB MC
Chapter 4,Elasticity Slide 66
The Price Elasticity of Supply
What do you think?
How would elasticity
of supply and
fluctuating demand
impact price volatility?
MB MC
Chapter 4,Elasticity Slide 67
Review key terms of chapter 4 (1)
Price elasticity of demand
Elastic
Inelastic
Unit elastic 0 1
Perfectly inelastic demand
(E=0)
Perfectly elastic demand
(E=infinite)
P
P
Q
Q
E D
p
Q
MB MC
Chapter 4,Elasticity Slide 68
Review key terms of chapter 4 (2)
MB MC
Chapter 4,Elasticity Slide 69
Review key terms of chapter 4 (3)
Cross-price elasticity of demand
substitute goods
complement goods
Income elasticity of demand
normal goods
inferior goods
00
2
2
1
1
P
P
Q
Q
E
00
I
I
Q
Q
E I
MB MC
Chapter 4,Elasticity Slide 70
Review key terms of chapter 4 (4)
Total revenue = P X Q
Total expenditure = P X Q
MB MC
Chapter 4,Elasticity Slide 71
Review key terms of chapter 4 (5)
Price elasticity of supply
Perfectly elastic supply (E=infinite)
Perfectly inelastic supply (E=0)
P
P
Q
Q
E D
P
Q
MB MC
End of
Chapter
