elasticities chapter 4: introduction to elasticities

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Elasticities hapter 4: Introduction to Elasticities

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Elasticities

Chapter 4: Introduction to Elasticities

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

For example,

Suppose the two economic variables are

Quantity Demanded (Qd)

and Price (P)

The Elasticity of Demandis defined as

The percentagechange in

divided by

the percentagechange in Price

Quantity Demanded

or as

% Qd

% P

where denotes change

Greek Delta

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

O C

Price

Quantity Demanded/ unit of time

Demand

O B C

Price

Quantity Demanded/ unit of time

Demand

Point of Unit Elasticity (-1)

O B C

Price

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

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

A Curve withUnitary Elasticity

Everywhere-1 elasticity of demand everywhere

Price

Quantity demanded per unit of time

Price

Quantity demanded per unit of time

A

O CB

BC = OB Elasticity of demand = -1

Price

Quantity demanded per unit of time

A

O CB

BC = OB Elasticity of demand = -1 at point A

Calculating Demand

Elasticities

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!

Two Demand Curves

D1

D2

Price

Quantity demanded / unit of time

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

Other Elasticities

Price Elasticity of Supply

Es = % in Qs

% in PUsually Positive

Usually Positive

Income Elasticity of Demand

Ei = % in Qd

% in Income

Occasionally negativeIncome Elasticity of Demand for hamburger

Links Income and Quantity Demanded

Income

Food Clothing

Income

Engel Curve