Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
The Concept of Elasticity Elasticity • Elasticity is a measure of the responsiveness of one variable to another. • The greater the elasticity, the greater the responsiveness. What is it and how to calculate it? Laugher Curve The Concept of Elasticity Q. What’s the difference between an economist and a befuddled old man with Alzheimer’s? A. The economist is the one with a calculator. • Elasticity is a measure of the responsiveness of one variable to another. • The greater the elasticity, the greater the responsiveness. 1 Price Elasticity Price Elasticity • The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. • The price elasticity of supply is the proportional change in quantity demanded relative to the proportional change in price. ED = Percentage change in quantity demanded Percentage change in price What Information Price Elasticity Provides • Price elasticity of demand and supply gives the exact quantity response to a change in price. ES = Percentage change in quantity supplied Percentage change in price Classifying Demand and Supply as Elastic or Inelastic • Demand or supply is elastic if the percentage change in quantity is greater than the percentage change in price. E>1 2 Classifying Demand and Supply as Elastic or Inelastic • Demand or supply is inelastic if the percentage change in quantity is less than the percentage change in price. Elastic Demand and Supply • Elastic supply means that quantity changes by a greater percentage than the percentage change in price. • The same holds true for demand. E<1 Inelastic Demand and Supply • Inelastic supply means that quantity doesn't change much with a change in price. • The same holds true for demand. Elasticity Is Independent of Units • Percentages allow us to have a measure of responsiveness that is independent of units. • This makes comparisons of responsiveness of different goods easier. 3 Calculating Elasticities • To determine elasticity divide the percentage change in quantity by the percentage change in price. The End-Point Problem • The end-point problem – the percentage change differs depending on whether you view the change as a rise or a decline in price. The End-Point Problem Graphs of Elasticities Price • Economists use the average of the end points to calculate the percentage change. (Q2 - Q1) Elasticity = (P 2 - P1 ) ½(Q2 + Q1 ) ½(P1 + P2 ) $26 24 22 20 18 16 14 B C (midpoint) A D Elasticity of demand between A and B = 1.27 0 10 12 14 Quantity of software (in hundred thousands) 4 Wage per hour Graphs of Elasticities $6.00 5.50 5.00 4.50 4.00 3.50 3.00 A Calculating Elasticity Q 2 − Q1 %∆Q 21 (Q 1 + Q 2 ) = E= P2 − P1 %∆P 1 2 (P1 + P2 ) B C (midpoint) Elasticity of supply between A and B = 0.18 0 470 480 490 Quantity of workers Calculating Elasticity of Supply Between Two Points $26 Price 24 22 Elasticity of demand between A and B: B midpoint C 20 18 16 A E= %∆ Q %∆ P 10 − 14 −4 1 − .33 2 (14 + 10) ED = = 12 = = 1.27 26 − 20 6 .26 1 ( 26 20 ) + 23 2 Demand Wage per hour Calculating Elasticity of Demand Between Two Points $6.00 5.50 5.00 4.50 4.00 3.50 3.00 A C 14 0 0 10 12 14 Quantity of software (in hundred thousands) Elasticity of supply between A and B: E = %∆Q B %∆P 485 − 475 10 1 .021 2 ( 485 + 475 ) ES = = 480 = = .2 5 − 4.50 .50 .105 1 4.75 2 (5 + 4.50) 470 480 490 Quantity of workers 5 Calculating Elasticity at a Point Calculating Elasticity at a Point • Let us now turn to a method of calculating the elasticity at a specific point, rather than over a range or an arc. • To calculate elasticity at a point, determine a range around that point and calculate the arc elasticity. Calculating Elasticity at a Point Calculating Elasticity at a Point (28 - 20) E at A = (5 - 3) C ½(28 + 20 ) = 0.66 ½(5 + 3 ) A B 20 24 28 40 $10 9 8 7 6 5 4 3 2 1 Price Price $10 9 8 7 6 5 4 3 2 1 Quantity To calculate elasticity at a point determine a range around that point and calculate the arc elasticity. Eat A = C A 1 2 B 20 24 28 Quantity 28 − 20 8 (28 + 20) 24 .33 = = = .66 5−3 2 .5 1 4 2 (5 + 3) 40 6 Elasticity and Supply and Demand Curves Calculating Elasticity at a Point – Elasticity is related (but is not the same as) slope. – Elasticity changes along straight-line demand and supply curves. Price • Two important points to consider: $10 9 8 7 6 5 4 3 2 1 Demand A D C E = 0.75 C 6 Elasticity and Supply and Demand Curves • Two important points to consider: – Elasticity is related (but is not the same as) slope. – Elasticity changes along straight-line demand and supply curves. Supply EA = 2.33 ED = 0.86 EB = 0.11 B 12 18 24 30 36 42 48 54 60 Quantity Elasticity Is Not the Same as Slope • The steeper the curve at a given point, the less elastic is supply or demand. • There are two limiting examples of this. 7 Elasticity Is Not the Same as Slope Elasticity Is Not the Same as Slope • When the curves are flat, we call the curves perfectly elastic. • When the curves are vertical, we call the curves perfectly inelastic. • The quantity changes enormously in response to a proportional change in price (E = ∞). • The quantity does not change at all in response to an enormous proportional change in price (E = 0). Perfectly Inelastic Demand Curve Perfectly Elastic Demand Curve 0 Price Price Perfectly inelastic demand curve Quantity 0 Perfectly elastic demand curve Quantity 8 Elasticity Changes Along Straight-Line Curves Ed = ∞ $10 9 8 7 6 5 4 3 2 1 Elasticity declines along demand curve as we move toward the quantity axis Ed > 1 Price • Elasticity is not the same as slope. • Elasticity changes along straight line supply and demand curves–slope does not. Elasticity Along a Demand Curve 0 Ed = 1 Ed < 1 Ed = 0 1 2 3 4 5 6 7 8 9 10 Quantity Elasticity Along a Supply Curve S0 Price $10 9 8 7 6 5 4 3 2 1 0 S1 Es declines Es = ∞ Es rises Es = 0 1 2 3 4 5 6 7 If the supply curve intersects the vertical axis, Es declines as you go up the supply curve. If the supply curve intersects the quantity axis, Es increases as you go up the supply curve. Quantity 9