the responsiveness of the amount purchased to a change in price. price elasticity of demand = % q %...
Post on 21-Dec-2015
250 views
TRANSCRIPT
the responsiveness of the amount purchased to a change in price.
Price Elasticityof demand =
% Q
% P=
% Change in quantity demanded% Change in Price
- or put more simply -
=
PED > 1 Elastic < 1 Inelastic
= 1 Unit Elastic
)()(
0
10
0
10
P
PP
Q
QQ =
)()(
0 1
0
0
10
P PP
Q
X
Mid Points Formula
Price Elasticityof demand =
% Q
% P=
% Change in quantity demanded% Change in Price
- But use average Q and average P -
2)(
)(
2)(
)(
10
10
10
10
PP
PP
= =)()(
)()(
1010
1010
PPPP
QQQQ
Inelastic 0.1 Salt
0.1 Matches 0.1 Toothpicks
0.1 Airline travel (short run) 0.2 Gasoline (short run) 0.7 Gasoline (long run) 0.1Natural gas, home (short run) 0.5Natural gas, home (long run) 0.3
Coffee
0.5Fish (cod), at home 0.5Tobacco products (short run) 0.4 Legal services (short run) 0.6
Physician services
0.6 Taxi (short run) 0.2Automobiles (long run)
Approximately Unitary Elasticity 0.9 Movies 1.2
Homes, owner occupied (long run) 0.9Shellfish (consumed at home) 1.1
Oysters (consumed at home) 1.1 Private education 0.9
Tires (short run) 1.2 Tires (long run) 1.2
Radio and television receivers Elastic
2.3 Restaurant meals 4.0
Foreign travel (long run) 2.4 Airline travel (long run) 2.8 Fresh green peas
1.2-1.5 Automobiles (short run) 4.0 Chevrolet automobiles
4.6Fresh tomatoes
Examples
Calculate the Price Elasticity of the following:
1. The number of cans demanded of a soft drink increases by 30 % after its price decreases by 40%2. The number of available apartments increases by 8% following a 6 % increase in rents3. The number of Caesar salads demanded at a restaurant increases from 60 to 80 per week when the price falls from $5.00 to $4.50
4. At a price of $200, 10,000 treadmills were supplied each month. Since the price increased to $250, 14,000 are supplied each month.
5. The number of DVDs demanded each weekend from Blockbuster falls from 500 to 400 following an increase in the rental charge from $2.00 to $2.40
Quan 1
2
3
4
5
6
7
8
Price 8
7
6
5
4
3
2
1
Elasticity
___
___
___
___
___
___
___
Total Revenue
___
___
___
___
___
___
___
___
=
=
=
=
=
=
=
X
X
X
X
X
X
X
X
Quan 1
100
20
12
150
45
32
Price 1
5
8
3
12
6
24
Quan 2
120
25
16
200
45
40
Price 2
3
7
0
10
8
2
Ch in Q Q1
___
___
___
___
___
___
X
X
X
X
X
X
P1 Ch in P
___
___
___
___
___
___
___
___
___
___
___
___
=
=
=
=
=
(b)
Price
Quantity/time
(a)
Price
Quantity/time
Mythicaldemandcurve
• Perfectly inelastic: An increase in Price
results in no change in Quantity
Different Elasticities
• Relatively inelastic: A percent increase in Price
results in a smaller % reduction in Quantity
Demand for Cigarettes
(c)
Price
Quantity/time
• Unitary elasticity: The percent change in
quantity demanded due to an increase in price is equal to
the % change in price.
Demand curve of unitary elasticity
= 1
(d)
Price
Quantity/time
• Relatively elastic: A % increase in Price
leads to a larger % reduction in Quantity.
Elasticity of Demand
(e)
Price
Quantity/time
• Perfectly elastic: Consumers will buy all of Farmer Hollings’s wheat at the market price, but none
will be sold above the market price.
Demand for Granny Smith Apples
Demand for Farmer Hollings’s wheat
2. Necessity vs Luxury
What affects Elasticity???
3. Proportion of Income
1. Available Substitutes
4. Time to shop around
a. Market Period
What affects Supply Elasticity???
b. Short Run
1. Time
c. Long Run
• Elastic supply– quantity supplied is sensitive to changes in price.
Inelastic demand – quantity supplied is not sensitive to changes in price.
Elastic and Inelastic Supply Curves
Price Price
Quantity Quantity
Income Elasticity• the responsiveness of a product’s
demand to a change in income.
Income Elasticityof demand =
% Change in quantity demanded
% Change in Income
• A normal good has a positive income elasticity of demand.– As income increases, the demand
for normal goods increases.• Goods with a negative income
elasticity are inferior goods.– As income expands, the demand
for inferior goods will decline.
High Income Elasticity2.46 Private education2.45New Cars1.57Recreation and amusements1.54Alcohol
Income Elasticity of DemandLow Income Elasticity
- 0.20 0.38 Fuel0.20 Electricity0.46Fish (haddock)0.51 Food0.64 Tobacco0.69Hospital care
Margarine
Cross Price Elasticity• the responsiveness of a product’s
demand to a change in the price of another good.
Cross Price Elasticity =
% Change in Qx
% Change in Py
• A complement has a negative cross price elasticity.
– As Py increases, the demand for Y decreases, and demand for goods that are consumed with Y also decreases.
• A substitute has a positive cross price elasticity– As Py increases, the demand for Y decreases,
and demand for goods that can be consumed instead of Y also decreases.
If Mr. Smith thinks the last dollar spent on shirts yields less satisfaction than the last dollar spent on cola, and Smith is a utility-maximizing consumer, he should
a.decrease his spending on cola.b. decrease his spending on cola and increase his
spending on shirts.c.increase his spending on shirts.d. increase his spending on cola and decrease his
spending on shirts.Which of the following would be the best example of consumer surplus?
a.Jane does not get cell-phone service because she feels that it is worth less than the $30 a month fee.
b. Sam pays $8 for a haircut that is worth $10 to him.c.Ralph buys a house for $104,000, the maximum amount
that he would be willing to pay for it.d. Sue purchases a book for $20 and uses a credit card to
pay for it.
“I like ice cream, but after eating homemade ice cream last night, I want to have something else for dessert today.” This statement most clearly reflects
a.the budget constraint.b.consumer irrationality.c. the second law of demand: Price elasticity increases with time.d.the law of diminishing marginal utility.
If Sarah’s income rises by 20 percent, and, as a result, she purchases 40 percent more designer clothing, her income elasticity for designer clothing is
a.0.5.b.1.0.c. 2.0.d.seriously distorted.
Suppose the state of New York imposes a one dollar per pack tax on cigarettes, which increases their price by 30 percent, and as a result, the quantity sold declines by 20 percent. The price elasticity of demand for cigarettes is equal to
a.–0.20.b.–0.67.c. –1.50.d.–3.00.
Studies indicate that the demand for fresh tomatoes is much more elastic than the demand for salt. These findings reflect that
a.tomatoes are a necessity while salt is a luxury.b.it takes longer for consumers to adjust to a change in the price
of salt than to a change in the price of tomatoes.c. salt will not spoil as easily as fresh tomatoes.d.more good substitutes exist for fresh tomatoes than for salt.
If a Krispy Kreme doughnut shop near campus increases its prices by 5 %, but revenues from its sales are unchanged, the price elasticity of demand for the services offered by the doughnut shop must be
a.elastic.b.of unitary elasticity.c. inelastic.d.equal to 0.5.
If the price of gasoline goes up, and Dan now buys fewer candy bars because he has to spend more on gas, this would best be explained by
a.the substitution effect.b.the income effect.c. the highly elastic demand for gasoline.d.weight watchers effect.
Which of the following is true for this demand curve?
a.An increase in price from $2 to $3 will reduce total expenditures on the product.
b.In the $2 to $3 range, the price elasticity of the demand curve is approximately unitary.
c. At a price of $2, the price elasticity of the demand curve equals approximately –2.5.
d.In the $2 to $3 range, the demand curve is inelastic.