elasticities chapter 4: introduction to elasticities
TRANSCRIPT
An Elasticity measures
of one economic variableto changes in anothereconomic variable
the responsiveness
Price
QuantityDemanded
For example,
How responsive is quantity suppliedto changes in the price of a good?
How responsive is quantity demandedto changes in the price of a good?
Any Elasticity is a Pure number...That is,
Elasticities have no unitssuch as $, lbs. or bushels
3
-1.2 -0.060.05
4.6
Any elasticity is a
ratio of two
percentage changes
in two different
economic variables
Percent change in quantity demanded
Percent change in price
The Elasticity of Demandis defined as
The percentagechange in
divided by
the percentagechange in Price
Quantity Demanded
An elasticity of demandis not the slopeof the demand curvebut is linked to the slope
Price
Quantity/ unit of time
D
For most (but not all!)demand curvesthe elasticity of demandvaries as you move alongthe demand curve
Price
Quantity/ unit of time
D
Demand
Elastic Portion
Inelastic Portion
Point of Unit Elasticity (-1)
O B C
OB=BC the Ed = -1Price
Quantity Demanded/ unit of time
Demand
Elastic Portion
Inelastic Portion
Point of Unit Elasticity (-1)
O B C
OB=BC the Ed = -1Price
Quantity Demanded/ unit of time
BC < OB then demand is inelastic
Demand
Elastic Portion
Inelastic Portion
Point of Unit Elasticity (-1)
O B C
OB=BC the Ed = -1Price
Quantity Demanded/ unit of time
BC < OB then demand is inelasticBC > OB then demand is elastic
Demand elasticities are negativebecause price and quantity demandedmove in opposite directions.
Price up; Quantity Demanded down.
Elastic demand: a number more negative than -1-2, -3, -6.5
Inelastic demand: A number between 0 and -1
-0.2, -0.3, -0.73
Unitary elasticity of demand: exactly -1
Suppose that
Price INCREASESfrom $6 to $8 and Quantity DemandedDECREASESfrom 12 units to 8 units
% in Qd
% in Price
8 - 12
$8 - $6
$7
10=
7 x - 4
10 x 2
= -28/20 = -1.4 = Ed
=
Elastic!
D2 is more ELASTIC than D1Qd is more responsive to Price changefor D2 than D1
But, certain points on D2
are less elastic than certain points on D1
This is because elasticities change as you move along the demand curve
Usually Positive
Income Elasticity of Demand
Ei = % in Qd
% in Income
Occasionally negativeIncome Elasticity of Demand for hamburger