Elasticity and Its
Application
Chapter 5
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity,,,
?… is a measure of how much buyers and
sellers respond to changes in market
conditions
?… allows us to analyze supply and
demand with greater precision.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Price Elasticity of Demand
?Price elasticity of demand is the
percentage change in quantity demanded
given a percent change in the price,
?It is a measure of how much the quantity
demanded of a good responds to a change
in the price of that good.
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Determinants of
Price Elasticity of Demand
?Necessities versus Luxuries
?Availability of Close Substitutes
?Definition of the Market
?Time Horizon
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Determinants of
Price Elasticity of Demand
Demand tends to be more elastic,
?if the good is a luxury.
?the longer the time period.
?the larger the number of close
substitutes.
?the more narrowly defined the market.
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Computing the Price Elasticity
of Demand
The price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by the percentage
change in price.
P r i c e E l a s ti c i ty o f D e m a n d =
P e r c e n ta g e C h a n g e
i n Q u a n ti t y D e m a n d e d
P e r c e n ta g e C h a n g e
i n P r i c e
P r i c e E l a s ti c i ty o f D e m a n d =
P e r c e n ta g e C h a n g e
i n Q u a n ti t y D e m a n d e d
P e r c e n ta g e C h a n g e
i n P r i c e
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
p r i c e inc 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 t i t y inc h a n g e P e r c e n t a g ed e m a n d of e l a s t i c i t yP r i c e ?
Example,If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your elasticity of demand would be
calculated as:
2
p e r c e n t10
p e r c e n t20
100
002
002202
100
10
810
??
?
?
?
?
.
)..(
)(
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity of
Demand Using the Midpoint
Formula
The midpoint formula is preferable when
calculating the price elasticity of demand
because it gives the same answer regardless
of the direction of the change.
)/2]P) / [ ( PP(P
)/2]Q) / [ ( QQ(Q=D e m a n d of El a s t i c i t y P ri c e
1212
1212
??
??
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
Example,If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones the your elasticity of demand,using the
midpoint formula,would be calculated as:
32.2
5.9
22
2/)20.200.2(
)00.220.2(
2/)810(
)810(
??
?
?
?
?
p er c en t
p er c en t
)/2]P) / [ ( PP(P
)/2]Q) / [ ( QQ(Q=D e m a n d of El a s t i c i t y P ri c e
1212
1212
??
??
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ranges of Elasticity
Inelastic Demand
?Quantity demanded does not respond strongly to
price changes.
?Price elasticity of demand is less than one.
Elastic Demand
?Quantity demanded responds strongly to changes
in price.
?Price elasticity of demand is greater than one.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
Demand is price elastic
$5
4 Demand
Quantity1000
Price
50
-3
p e r c e n t 22-
p e r c e n t 67
5, 0 0 ) / 2( 4, 0 0
5, 0 0 )-( 4, 0 0
5 0 ) / 2( 1 0 0
50)-( 1 0 0
E
D
??
?
?
?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ranges of Elasticity
?Perfectly Inelastic
Quantity demanded does not respond to price
changes.
?Perfectly Elastic
Quantity demanded changes infinitely with any
change in price.
?Unit Elastic
Quantity demanded changes by the same
percentage as the price.
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A Variety of Demand Curves
Because the price elasticity
of demand measures how
much quantity demanded
responds to the price,it is
closely related to the slope of
the demand curve.
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Perfectly Inelastic Demand
- Elasticity equals 0
Quantity
Price
4
$5
Demand
100
2.,..leaves the quantity demanded unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Demand
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10090
2.,..leads to a 11% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Demand
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10080
2.,..leads to a 22% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Demand
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10050
2.,..leads to a 67% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Demand
- Elasticity equals infinity
Quantity
Price
Demand$4
1,At any price
above $4,quantity
demanded is zero.
2,At exactly $4,
consumers will
buy any quantity.
3,At a price below $4,
quantity demanded is infinite.
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Elasticity and Total Revenue
?Total revenue is the amount paid by
buyers and received by sellers of a good.
?Computed as the price of the good times
the quantity sold.
TR = P x Q
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
$4
Demand
Quantity
P
0
Price
P x Q = $400
(total revenue)
100
Q
Elasticity and Total Revenue
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue
With an inelastic demand
curve,an increase in price
leads to a decrease in quantity
that is proportionately
smaller,Thus,total revenue
increases.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Inelastic Demand
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
…leads to an increase
in total revenue
from$100 to $240
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue
With an elastic demand curve,
an increase in the price leads to
a decrease in quantity demanded
that is proportionately larger,
Thus,total revenue decreases.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Elastic Demand
Demand
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
Revenue = $200
An increase in price
from $4 to $5...
…leads to a decrease
in total revenue
from$200 to $100
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Elasticity of a
Linear Demand Curve
P r i c e Q ua nt i t y
Tot a l R e v e nue
( P r i c e x
Q ua nt i t y )
P e r c e nt C ha nge
i n P r i c e
P e r c e nt
C ha nge
i n Q ua nt i t y E l a s t i c i t y D e s c r i pt i on
$0 14 $0 200% 15% 0, 1 I ne l a s t i c
1 12 12 67 18 0, 3 I ne l a s t i c
2 10 20 40 22 0, 6 I ne l a s t i c
3 8 24 29 29 1 U ni t e l a s t i c
4 6 24 22 40 1, 8 e l a s t i c
5 4 20 18 67 3, 7 e l a s t i c
6 2 12 15 200 13 e l a s t i c
7 0 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Income Elasticity of Demand
?Income elasticity of demand measures
how much the quantity demanded of a
good responds to a change in consumers’
income,
?It is computed as the percentage change
in the quantity demanded divided by the
percentage change in income.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing Income Elasticity
Income Elasticity
of Demand
Percentage Change
in Quantity Demanded
Percentage Change
in Income
=
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Income Elasticity
- Types of Goods -
?Normal Goods
?Inferior Goods
?Higher income raises the quantity
demanded for normal goods but lowers
the quantity demanded for inferior
goods,
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Income Elasticity
- Types of Goods -
?Goods consumers regard as necessities
tend to be income inelastic
Examples include food,fuel,clothing,utilities,
and medical services.
?Goods consumers regard as luxuries tend
to be income elastic.
Examples include sports cars,furs,and
expensive foods.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Price Elasticity of Supply
?Price elasticity of supply is the
percentage change in quantity supplied
resulting from a percent change in price.
?It is a measure of how much the quantity
supplied of a good responds to a change
in the price of that good.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ranges of Elasticity
?Perfectly Elastic
ES = ?
?Relatively Elastic
ES > 1
?Unit Elastic
ES = 1
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Ranges of Elasticity
?Relatively Inelastic
ES < 1
?Perfectly Inelastic
ES = 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Inelastic Supply
- Elasticity equals 0
Quantity
Price
4
$5
Supply
100
2.,..leaves the quantity supplied unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Supply
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
110100
Supply
2.,..leads to a 10% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Supply
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
125100
Supply
2.,..leads to a 22% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Supply
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
200100
Supply
2.,..leads to a 67% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Supply
- Elasticity equals infinity
Quantity
Price
Supply$4
1,At any price
above $4,quantity
supplied is infinite.
2,At exactly $4,
producers will
supply any quantity.
3,At a price below $4,
quantity supplied is zero.
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Determinants of
Elasticity of Supply
?Ability of sellers to change the amount of
the good they produce.
?Beach-front land is inelastic.
?Books,cars,or manufactured goods are
elastic.
?Time period,
?Supply is more elastic in the long run.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Supply
The price elasticity of supply is
computed as the percentage change
in the quantity supplied divided by
the percentage change in price.E l a s t i c i t y o f S u p p l y =
P e r c e n t a g e C h a n g e i n
Q u a n t i t y S u p p l i e d
P e r c e n t a g e C h a n g e
i n P r i c e
E l a s t i c i t y o f S u p p l y =
P e r c e n t a g e C h a n g e i n
Q u a n t i t y S u p p l i e d
P e r c e n t a g e C h a n g e
i n P r i c e
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Application of Elasticity
?Can good news for farming be bad news for
farmers?
?What happens to wheat farmers and the market
for wheat when university agronomists discover a
new wheat hybrid that is more productive than
existing varieties?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Application of Elasticity
?Examine whether the supply or demand
curve shifts.
?Determine the direction of the shift of the
curve.
?Use the supply-and-demand diagram to
see how the market equilibrium changes.
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price of
Wheat
Demand
S1
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
3.,..and a proportionately smaller
increase in quantity sold,As a result,
revenue falls from $300 to $220.
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price of
Wheat 1,When demand is inelastic,an increase in supply...
Demand
S1 S2
2
110
2.,..leads
to a large
fall in
price...
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Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Compute Elasticity
- 0, 2 4
0, 4
0, 0 9 5-
2, 0 0 ) / 2( 3, 0 0
2, 0 0-3, 0 0
1 1 0 ) / 2( 1 0 0
110-100
=E
D
??
?
?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Compute Elasticity
- 0, 2 4
0, 4
0, 0 9 5-
2, 0 0 ) / 2( 3, 0 0
2, 0 0-3, 0 0
1 1 0 ) / 2( 1 0 0
110-100
=E
D
??
?
?
Demand is inelastic
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Price elasticity of demand measures
how much the quantity demanded
responds to changes in the price,
?If a demand curve is elastic,total
revenue falls when the price rises,
?If it is inelastic,total revenue rises as
the price rises.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?The price elasticity of supply measures
how much the quantity supplied
responds to changes in the price,
?In most markets,supply is more elastic
in the long run than in the short run.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Graphical
Review
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
Demand is price elastic
$5
4 Demand
Quantity1000
Price
50
-3
p e r c e n t 22-
p e r c e n t 67
5, 0 0 ) / 2( 4, 0 0
5, 0 0 )-( 4, 0 0
5 0 ) / 2( 1 0 0
50)-( 1 0 0
E
D
??
?
?
?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Inelastic Demand
- Elasticity equals 0
Quantity
Price
4
$5
Demand
100
2.,..leaves the quantity demanded unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Demand
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10090
2.,..leads to a 11% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Demand
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10080
2.,..leads to a 22% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Demand
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10050
2.,..leads to a 67% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Demand
- Elasticity equals infinity
Quantity
Price
Demand$4
1,At any price
above $4,quantity
demanded is zero.
2,At exactly $4,
consumers will
buy any quantity.
3,At a price below $4,
quantity demanded is infinite.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
$4
Demand
Quantity
P
0
Price
P x Q = $400
(total revenue)
100
Q
Elasticity and Total Revenue
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Inelastic Demand
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
…leads to an increase
in total revenue
from$100 to $240
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Elastic Demand
Demand
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
Revenue = $200
An increase in price
from $4 to $5...
…leads to a decrease
in total revenue
from$200 to $100
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Inelastic Supply
- Elasticity equals 0
Quantity
Price
4
$5
Supply
100
2.,..leaves the quantity supplied unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Supply
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
110100
Supply
2.,..leads to a 10% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Supply
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
125100
Supply
2.,..leads to a 22% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Supply
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
200100
Supply
2.,..leads to a 67% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Supply
- Elasticity equals infinity
Quantity
Price
Supply$4
1,At any price
above $4,quantity
supplied is infinite.
2,At exactly $4,
producers will
supply any quantity.
3,At a price below $4,
quantity supplied is zero.
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price of
Wheat
Demand
S1
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Increase in Supply in the
Market for Wheat
3.,..and a proportionately smaller
increase in quantity sold,As a result,
revenue falls from $300 to $220.
$3
Quantity of Wheat1000
Price of
Wheat 1,When demand is inelastic,an increase in supply...
Demand
S1 S2
2
110
2.,..leads
to a large
fall in
price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Application
Chapter 5
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity,,,
?… is a measure of how much buyers and
sellers respond to changes in market
conditions
?… allows us to analyze supply and
demand with greater precision.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Price Elasticity of Demand
?Price elasticity of demand is the
percentage change in quantity demanded
given a percent change in the price,
?It is a measure of how much the quantity
demanded of a good responds to a change
in the price of that good.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Determinants of
Price Elasticity of Demand
?Necessities versus Luxuries
?Availability of Close Substitutes
?Definition of the Market
?Time Horizon
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Determinants of
Price Elasticity of Demand
Demand tends to be more elastic,
?if the good is a luxury.
?the longer the time period.
?the larger the number of close
substitutes.
?the more narrowly defined the market.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
The price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by the percentage
change in price.
P r i c e E l a s ti c i ty o f D e m a n d =
P e r c e n ta g e C h a n g e
i n Q u a n ti t y D e m a n d e d
P e r c e n ta g e C h a n g e
i n P r i c e
P r i c e E l a s ti c i ty o f D e m a n d =
P e r c e n ta g e C h a n g e
i n Q u a n ti t y D e m a n d e d
P e r c e n ta g e C h a n g e
i n P r i c e
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
p r i c e inc 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 t i t y inc h a n g e P e r c e n t a g ed e m a n d of e l a s t i c i t yP r i c e ?
Example,If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your elasticity of demand would be
calculated as:
2
p e r c e n t10
p e r c e n t20
100
002
002202
100
10
810
??
?
?
?
?
.
)..(
)(
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity of
Demand Using the Midpoint
Formula
The midpoint formula is preferable when
calculating the price elasticity of demand
because it gives the same answer regardless
of the direction of the change.
)/2]P) / [ ( PP(P
)/2]Q) / [ ( QQ(Q=D e m a n d of El a s t i c i t y P ri c e
1212
1212
??
??
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
Example,If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones the your elasticity of demand,using the
midpoint formula,would be calculated as:
32.2
5.9
22
2/)20.200.2(
)00.220.2(
2/)810(
)810(
??
?
?
?
?
p er c en t
p er c en t
)/2]P) / [ ( PP(P
)/2]Q) / [ ( QQ(Q=D e m a n d of El a s t i c i t y P ri c e
1212
1212
??
??
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ranges of Elasticity
Inelastic Demand
?Quantity demanded does not respond strongly to
price changes.
?Price elasticity of demand is less than one.
Elastic Demand
?Quantity demanded responds strongly to changes
in price.
?Price elasticity of demand is greater than one.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
Demand is price elastic
$5
4 Demand
Quantity1000
Price
50
-3
p e r c e n t 22-
p e r c e n t 67
5, 0 0 ) / 2( 4, 0 0
5, 0 0 )-( 4, 0 0
5 0 ) / 2( 1 0 0
50)-( 1 0 0
E
D
??
?
?
?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ranges of Elasticity
?Perfectly Inelastic
Quantity demanded does not respond to price
changes.
?Perfectly Elastic
Quantity demanded changes infinitely with any
change in price.
?Unit Elastic
Quantity demanded changes by the same
percentage as the price.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Variety of Demand Curves
Because the price elasticity
of demand measures how
much quantity demanded
responds to the price,it is
closely related to the slope of
the demand curve.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Inelastic Demand
- Elasticity equals 0
Quantity
Price
4
$5
Demand
100
2.,..leaves the quantity demanded unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Demand
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10090
2.,..leads to a 11% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Demand
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10080
2.,..leads to a 22% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Demand
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10050
2.,..leads to a 67% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Demand
- Elasticity equals infinity
Quantity
Price
Demand$4
1,At any price
above $4,quantity
demanded is zero.
2,At exactly $4,
consumers will
buy any quantity.
3,At a price below $4,
quantity demanded is infinite.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue
?Total revenue is the amount paid by
buyers and received by sellers of a good.
?Computed as the price of the good times
the quantity sold.
TR = P x Q
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
$4
Demand
Quantity
P
0
Price
P x Q = $400
(total revenue)
100
Q
Elasticity and Total Revenue
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue
With an inelastic demand
curve,an increase in price
leads to a decrease in quantity
that is proportionately
smaller,Thus,total revenue
increases.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Inelastic Demand
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
…leads to an increase
in total revenue
from$100 to $240
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue
With an elastic demand curve,
an increase in the price leads to
a decrease in quantity demanded
that is proportionately larger,
Thus,total revenue decreases.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Elastic Demand
Demand
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
Revenue = $200
An increase in price
from $4 to $5...
…leads to a decrease
in total revenue
from$200 to $100
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Elasticity of a
Linear Demand Curve
P r i c e Q ua nt i t y
Tot a l R e v e nue
( P r i c e x
Q ua nt i t y )
P e r c e nt C ha nge
i n P r i c e
P e r c e nt
C ha nge
i n Q ua nt i t y E l a s t i c i t y D e s c r i pt i on
$0 14 $0 200% 15% 0, 1 I ne l a s t i c
1 12 12 67 18 0, 3 I ne l a s t i c
2 10 20 40 22 0, 6 I ne l a s t i c
3 8 24 29 29 1 U ni t e l a s t i c
4 6 24 22 40 1, 8 e l a s t i c
5 4 20 18 67 3, 7 e l a s t i c
6 2 12 15 200 13 e l a s t i c
7 0 0
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Income Elasticity of Demand
?Income elasticity of demand measures
how much the quantity demanded of a
good responds to a change in consumers’
income,
?It is computed as the percentage change
in the quantity demanded divided by the
percentage change in income.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing Income Elasticity
Income Elasticity
of Demand
Percentage Change
in Quantity Demanded
Percentage Change
in Income
=
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Income Elasticity
- Types of Goods -
?Normal Goods
?Inferior Goods
?Higher income raises the quantity
demanded for normal goods but lowers
the quantity demanded for inferior
goods,
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Income Elasticity
- Types of Goods -
?Goods consumers regard as necessities
tend to be income inelastic
Examples include food,fuel,clothing,utilities,
and medical services.
?Goods consumers regard as luxuries tend
to be income elastic.
Examples include sports cars,furs,and
expensive foods.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Price Elasticity of Supply
?Price elasticity of supply is the
percentage change in quantity supplied
resulting from a percent change in price.
?It is a measure of how much the quantity
supplied of a good responds to a change
in the price of that good.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ranges of Elasticity
?Perfectly Elastic
ES = ?
?Relatively Elastic
ES > 1
?Unit Elastic
ES = 1
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Ranges of Elasticity
?Relatively Inelastic
ES < 1
?Perfectly Inelastic
ES = 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Inelastic Supply
- Elasticity equals 0
Quantity
Price
4
$5
Supply
100
2.,..leaves the quantity supplied unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Supply
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
110100
Supply
2.,..leads to a 10% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Supply
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
125100
Supply
2.,..leads to a 22% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Supply
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
200100
Supply
2.,..leads to a 67% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Supply
- Elasticity equals infinity
Quantity
Price
Supply$4
1,At any price
above $4,quantity
supplied is infinite.
2,At exactly $4,
producers will
supply any quantity.
3,At a price below $4,
quantity supplied is zero.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Determinants of
Elasticity of Supply
?Ability of sellers to change the amount of
the good they produce.
?Beach-front land is inelastic.
?Books,cars,or manufactured goods are
elastic.
?Time period,
?Supply is more elastic in the long run.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Supply
The price elasticity of supply is
computed as the percentage change
in the quantity supplied divided by
the percentage change in price.E l a s t i c i t y o f S u p p l y =
P e r c e n t a g e C h a n g e i n
Q u a n t i t y S u p p l i e d
P e r c e n t a g e C h a n g e
i n P r i c e
E l a s t i c i t y o f S u p p l y =
P e r c e n t a g e C h a n g e i n
Q u a n t i t y S u p p l i e d
P e r c e n t a g e C h a n g e
i n P r i c e
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Application of Elasticity
?Can good news for farming be bad news for
farmers?
?What happens to wheat farmers and the market
for wheat when university agronomists discover a
new wheat hybrid that is more productive than
existing varieties?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Application of Elasticity
?Examine whether the supply or demand
curve shifts.
?Determine the direction of the shift of the
curve.
?Use the supply-and-demand diagram to
see how the market equilibrium changes.
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price of
Wheat
Demand
S1
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
3.,..and a proportionately smaller
increase in quantity sold,As a result,
revenue falls from $300 to $220.
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price of
Wheat 1,When demand is inelastic,an increase in supply...
Demand
S1 S2
2
110
2.,..leads
to a large
fall in
price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Compute Elasticity
- 0, 2 4
0, 4
0, 0 9 5-
2, 0 0 ) / 2( 3, 0 0
2, 0 0-3, 0 0
1 1 0 ) / 2( 1 0 0
110-100
=E
D
??
?
?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Compute Elasticity
- 0, 2 4
0, 4
0, 0 9 5-
2, 0 0 ) / 2( 3, 0 0
2, 0 0-3, 0 0
1 1 0 ) / 2( 1 0 0
110-100
=E
D
??
?
?
Demand is inelastic
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Price elasticity of demand measures
how much the quantity demanded
responds to changes in the price,
?If a demand curve is elastic,total
revenue falls when the price rises,
?If it is inelastic,total revenue rises as
the price rises.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?The price elasticity of supply measures
how much the quantity supplied
responds to changes in the price,
?In most markets,supply is more elastic
in the long run than in the short run.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Graphical
Review
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Computing the Price Elasticity
of Demand
Demand is price elastic
$5
4 Demand
Quantity1000
Price
50
-3
p e r c e n t 22-
p e r c e n t 67
5, 0 0 ) / 2( 4, 0 0
5, 0 0 )-( 4, 0 0
5 0 ) / 2( 1 0 0
50)-( 1 0 0
E
D
??
?
?
?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Inelastic Demand
- Elasticity equals 0
Quantity
Price
4
$5
Demand
100
2.,..leaves the quantity demanded unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Demand
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10090
2.,..leads to a 11% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Demand
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10080
2.,..leads to a 22% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Demand
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
Demand
10050
2.,..leads to a 67% decrease in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Demand
- Elasticity equals infinity
Quantity
Price
Demand$4
1,At any price
above $4,quantity
demanded is zero.
2,At exactly $4,
consumers will
buy any quantity.
3,At a price below $4,
quantity demanded is infinite.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
$4
Demand
Quantity
P
0
Price
P x Q = $400
(total revenue)
100
Q
Elasticity and Total Revenue
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Inelastic Demand
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
…leads to an increase
in total revenue
from$100 to $240
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elasticity and Total Revenue,
Elastic Demand
Demand
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
Revenue = $200
An increase in price
from $4 to $5...
…leads to a decrease
in total revenue
from$200 to $100
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Inelastic Supply
- Elasticity equals 0
Quantity
Price
4
$5
Supply
100
2.,..leaves the quantity supplied unchanged.
1,An
increase
in price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Inelastic Supply
- Elasticity is less than 1
Quantity
Price
4
$51,A 22%
increase
in price...
110100
Supply
2.,..leads to a 10% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Unit Elastic Supply
- Elasticity equals 1
Quantity
Price
4
$51,A 22%
increase
in price...
125100
Supply
2.,..leads to a 22% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Elastic Supply
- Elasticity is greater than 1
Quantity
Price
4
$51,A 22%
increase
in price...
200100
Supply
2.,..leads to a 67% increase in quantity.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Perfectly Elastic Supply
- Elasticity equals infinity
Quantity
Price
Supply$4
1,At any price
above $4,quantity
supplied is infinite.
2,At exactly $4,
producers will
supply any quantity.
3,At a price below $4,
quantity supplied is zero.
An Increase in Supply in the
Market for Wheat
$3
Quantity of Wheat1000
Price of
Wheat
Demand
S1
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Increase in Supply in the
Market for Wheat
3.,..and a proportionately smaller
increase in quantity sold,As a result,
revenue falls from $300 to $220.
$3
Quantity of Wheat1000
Price of
Wheat 1,When demand is inelastic,an increase in supply...
Demand
S1 S2
2
110
2.,..leads
to a large
fall in
price...
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
