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*,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Elasticity and Its Application,Chapter 5,Copyright 2001 by Harcourt, Inc,.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to:,Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,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.,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.,Determinants of Price Elasticity of Demand,Necessities versus Luxuries,Availability of Close Substitutes,Definition of the Market,Time Horizon,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.,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.,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 then your elasticity of demand would be calculated as:,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.,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:,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.,Computing the Price Elasticity of Demand,Demand is,price elastic,$5,4,Demand,Quantity,100,0,Price,50,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.,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.,Perfectly Inelastic Demand,- Elasticity equals 0,Quantity,Price,4,$5,Demand,100,2. .leaves the quantity demanded unchanged.,1. An,increase,in price.,Inelastic Demand,- Elasticity is less than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,Demand,100,90,2. .leads to a 11% decrease in quantity.,Unit Elastic Demand,- Elasticity equals 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,Demand,100,80,2. .leads to a 22% decrease in quantity.,Elastic Demand,- Elasticity is greater than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,Demand,100,50,2. .leads to a 67% decrease in quantity.,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.,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,$4,Demand,Quantity,P,0,Price,P,x,Q,=,$400,(total revenue),100,Q,Elasticity and Total Revenue,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,.,Elasticity and Total Revenue: Inelastic Demand,$3,Quantity,0,Price,80,Revenue,=,$240,Demand,$1,Demand,Quantity,0,Revenue,=,$100,100,Price,An increase in price from $1 to $3.,leads to an,increase,in total revenue from$100 to $240,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.,Elasticity and Total Revenue: Elastic Demand,Demand,Quantity,0,Price,$4,50,Demand,Quantity,0,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,Computing the Elasticity of a Linear Demand Curve,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.,Computing Income Elasticity,Income Elasticity,of Demand,Percentage Change,in Quantity Demanded,Percentage Change,in Income,=,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,.,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.,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.,Ranges of Elasticity,Perfectly Elastic,E,S,=,Relatively Elastic,E,S, 1,Unit Elastic,E,S,= 1,Ranges of Elasticity,Relatively Inelastic,E,S, 1,Perfectly Inelastic,E,S,= 0,Perfectly Inelastic Supply,- Elasticity equals 0,Quantity,Price,4,$5,Supply,100,2. .leaves the quantity supplied unchanged.,1. An,increase,in price.,Inelastic Supply,- Elasticity is less than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,110,100,Supply,2. .leads to a 10% increase in quantity.,Unit Elastic Supply,- Elasticity equals 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,125,100,Supply,2. .leads to a 22% increase in quantity.,Elastic Supply,- Elasticity is greater than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,200,100,Supply,2. .leads to a 67% increase in quantity.,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.,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.,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.,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 hybridthat is more productive than existing varieties?,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 Wheat,100,0,Price of,Wheat,Demand,S,1,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 Wheat,100,0,Price of,Wheat,1. When demand is inelastic,an increase in supply.,Demand,S,1,S,2,2,110,2. .leads,to a large,fall in,price.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Compute Elasticity,Compute Elasticity,Demand is inelastic,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.,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.,Graphical Review,Computing the Price Elasticity of Demand,Demand is,price elastic,$5,4,Demand,Quantity,100,0,Price,50,Perfectly Inelastic Demand,- Elasticity equals 0,Quantity,Price,4,$5,Demand,100,2. .leaves the quantity demanded unchanged.,1. An,increase,in price.,Inelastic Demand,- Elasticity is less than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,Demand,100,90,2. .leads to a 11% decrease in quantity.,Unit Elastic Demand,- Elasticity equals 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,Demand,100,80,2. .leads to a 22% decrease in quantity.,Elastic Demand,- Elasticity is greater than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,Demand,100,50,2. .leads to a 67% decrease in quantity.,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.,$4,Demand,Quantity,P,0,Price,P,x,Q,=,$400,(total revenue),100,Q,Elasticity and Total Revenue,Elasticity and Total Revenue: Inelastic Demand,$3,Quantity,0,Price,80,Revenue,=,$240,Demand,$1,Demand,Quantity,0,Revenue,=,$100,100,Price,An increase in price from $1 to $3.,leads to an,increase,in total revenue from$100 to $240,Elasticity and Total Revenue: Elastic Demand,Demand,Quantity,0,Price,$4,50,Demand,Quantity,0,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,Perfectly Inelastic Supply,- Elasticity equals 0,Quantity,Price,4,$5,Supply,100,2. .leaves the quantity supplied unchanged.,1. An,increase,in price.,Inelastic Supply,- Elasticity is less than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,110,100,Supply,2. .leads to a 10% increase in quantity.,Unit Elastic Supply,- Elasticity equals 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,125,100,Supply,2. .leads to a 22% increase in quantity.,Elastic Supply,- Elasticity is greater than 1,Quantity,Price,4,$5,1. A 22%,increase,in price.,200,100,Supply,2. .leads to a 67% increase in quantity.,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 Wheat,100,0,Price of,Wheat,Demand,S,1,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 Wheat,100,0,Price of,Wheat,1. When demand is inelastic,an increase in supply.,Demand,S,1,S,2,2,110,2. .leads,to a large,fall in,price.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,
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