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Price Elasticity of Demand
Quantity Demanded
1
4
10
18
More Fun With Elasticities
E>1 Elastic E<1 Inelastic
Demand Schedule for Dry-Cleaned Shirts
Price per shirt
Total Revenue
$4.00
3.00
2.00
1.00
E=1
E, I, or U?
Midpoint Formula
Average QD
Average price
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=Ed
Inelastic demand
What price and revenue implications could the following have?
o Farmers: inelastic demand; productivity/technology improvement
Unity
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Excise tax: extra tax on a particular good
A $.50 per unit excise tax on 100,000 units sold brings in _____ in revenue
Raising the excise tax to $1.00 decreases quantity demanded to 35,000, thus
decreasing the government’s revenue to _____________.
Demand at this range for this product is ________________ (elastic or inelastic)
The government should tax items that have _______________ demand.
Cross Elasticity of Demand
Positive=substitutes
Negative=complements
0 or near 0=independent (unrelated)
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We pay attention to minus signs with cross elasticity. With price elasticity of
demand, the coefficient would always be negative due to the inverse relationship
between price and quantity demanded, but we ignore the minus sign. In this case,
we will get some positive answers and some negative.
% change in QD of X
% change in price of Y
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A 5% increase in the price of guns results in a 15% decrease in the quantity
demanded for bullets.
______ Cross elasticity coefficient
Complement or Substitute?
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A 4% decrease in the price of Coke results in an 8% decrease in the quantity
demanded for Pepsi.
______ Cross elasticity coefficient
Complement or Substitute?
Income Elasticity of Demand
% change in quantity demanded
% change in price
Positive=superior (normal)
Negative=inferior
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A 4% increase in the population’s income results in a 2% increase in quantity
demanded for new cars
_____ Income elasticity coefficient
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Superior or Inferior?
A 10% increase in the population’s income results in a 5% decrease in quantity
demanded for plastic jewelry
_____ Income elasticity coefficient
Price Elasticity of Supply
Superior or Inferior?
% change price
% change QS
Supply is:
Elastic if > 1
Inelastic if < 1
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Measures responsiveness of producers to price changes. If they are responsive,
supply is elastic. If they are responsive to price changes, supply is inelastic.
Market period—period immediately following a market price change when time
is too short for producer to respond with a quantity supplied change.
Short run—period of time too short to change plant capacity, but long enough to
used fixed plant more or less intensively.
Long run—time period long enough for producer to adjust plant capacity or for new firms to
enter/leave the industry
All of these time periods depend on the product and circumstances surrounding
the producer.