Download Elasticity

Elasticity
Definition and Useful
Applications
Price Elasticity of Demand
Ratio of Percentage Change in Quantity
Demanded to Percentage Change in Price
% Change in Quantity Demanded
Price Elasticity of Demand =
%Change in Price
Q P

*
Q P
Types of Elasticity
Inelastic -- Percentage change in quantity
demanded less than percentage change in
price. Numerical value between 0 and -1
Elastic -- Percentage changes in quantity
demanded exceeds the percentage change in
price. Absolute value greater than 1
Unitary Elasticity- Numerical value equals 1.
Rank Elasticities
Beef
Salt
European vacation
Steak
Honda Accord
Dijon mustard
Factors Affecting Elasticity of
Demand
Availability of Substitutes
Fraction of Income Spent on Good
Adjustment Time
Perfectly Elastic
8
7
6
5
4
3
2
1
0
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Perfectly Inelastic
10
9
8
7
6
5
4
3
2
1
0
0
2
4
Elasticity vs Slope
Elasticity vs Slope
 Slope = P/Q=-2
 Elasticity at P=1
%DQ=(4.5-4)/4.25
%DP=(1-2)/1.5
%DQ/%DP=-.177
 Elasticity at P=6
%DQ=(2-1.5)/1.75
%DP=(6-7)/6.5
%DQ/%DP=-1.86
 Elasticity changes along
the demand curve
 Unitary elasticity between
P=4 and P=5
 Above point of unitary
elasticity, demand is
elastic
 Below point of unitary
elasticity, demand is
inelastic
Revenue and Elasticity
Q
Price
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Elas ticity
10
9
8
7
6
5
4
3
2
1
0
-19.00
-5.6 7
-3.0 0
-1.8 6
-1.2 2
-0.8 2
-0.5 4
-0.3 3
-0.1 8
-0.0 5
Total Reven ue
0
4.5
8
10.5
12
12.5
12
10.5
8
4.5
0
Total Revenue
Elasticity of Supply
Ratio of Percentage Change in Quantity
Supplied to Percentage Change in Price
Ranking Supply
Elasticities
Rental Housing (short run)
Retail sales clerks
Computer programmers
Tiger Woods
Compact Discs