Download 1999 South-Western College Publishing

Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
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Chapter 4
Elasticity
©1999 South-Western College Publishing
5/16/20
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2
This chapter discusses
principles associated with
Determinants
of
Normal
&
Inferior
Price
Substitute
Elasticity
and
of
Cross
SupplyElasticity
Elasticity
Elasticity
and
Taxes
Demand
Sensitivity
to
Demand
Sensitivity
Complementary
Demand
Goods
Goods
Price Changes
©1999 South-Western College Publishing
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How would you
respond to a cut in
the price of a Coke?
That all depends on
the price sensitivity
of demand for Coke
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A
P
P
D
D
0
Q
B
0
Q
Which demand curve is for spark
plugs and which for Coca-Cola?
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When consumers are very
sensitive to a price change
what does the demand
curve look like?
Relatively flat
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When consumers are less
sensitive to a price change
what does the demand
curve look like?
Relatively
steep
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What factors influence
Demand Sensitivity?
• Low price goods
• Income levels
• Substitute goods
• Basic goods
• Linked goods
• Time to adjust
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What do low priced goods
have to do with sensitivity?
The lower the price of a
good the less sensitive
consumers are to a price
change
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How do income levels
effect demand?
Poor people are more
sensitive to price
changes than rich people
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What do substitutes have to
do with sensitivity?
The more substitutes a
good has, the more
sensitive consumers are to
a price change
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What do basic goods have
to do with sensitivity?
The greater the need of a
good to the consumer, the
less sensitive the consumer
is to a price change
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What do linked goods have
to do with sensitivity?
When two goods have a
complementary relationship,
demand sensitivities are
linked to one another
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What are some examples
of Complementary Goods?
•computers and software
•cars and gasoline
• tapes and tape players
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What does time have to
do with sensitivity?
The more time to adjust, the
more sensitive consumers
are to a price change
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What is Elasticity?
A term economists use to
measure sensitivity
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How do we measure the
Price Elasticity of Demand?
The percentage change in
quantity demanded
divided by the percentage
change in price
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If there is an increase
from 3 units to 5, what is
the percentage increase?
2/3 = 66%
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If there is a decrease from
5 units to 3, what is the
percentage decrease?
2/5 = 40%
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P
A
2
B
3
D
Q
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Problem - When we
move along a demand curve
between two points, we get
different answers to elasticity
depending if we are moving
up or down the demand curve
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If we go from 3 to 5,
the percentage change is
2/3 , but if we go from 5
to 3, the percentage
change is 2/5 , so the
elasticities are different
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The answer to this
problem is to work with
averages ...
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Price elasticity equals the
change in quantity demanded
sum of quantities/2
divided by
change in price
sum of prices/2
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24
Quantity
Bananas
200
Oranges
240
400
280
Price
$20
$18
$40
$70
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2
5
What is the Price Elasticity
of Demand for bananas?
2
40
=
220
19
40 X 19
760
=
2
220
440
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What is the Price Elasticity
of Demand for oranges?
120
30
=
340
55
120 X 55
6,600
=
30
340
10,200
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If a college raises tuition,
what happens to revenue?
If demand is elastic revenue goes down
If demand is inelastic revenue goes up
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If price increases and the
revenue increases, the
demand curve within the
price range is price
inelastic, < 1
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If price increases and
the revenue decreases,
the demand curve
within the price range
is price elastic, > 1
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If total revenue does
not change when
price increases, the
demand curve is
unitary elastic,
value equals 1
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What strategies do CocaCola and Pepsi use to
make the demand for their
products less elastic?
http://www.cocacola.com
http://www.pepsi.com
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What is Cross Elasticity
of Demand?
The percentage change in
the quantity demanded of
one commodity resulting
from a 1 percent change in
price of another commodity
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If negative - complements
(steak & steak sauce)
If positive - substitutes
(butter & margarine)
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What is Income
Elasticity of Demand?
The ratio of the percentage
change in quantity
demanded to the percentage
change in income
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When is a demand curve
income elastic?
When a 1% change in
income generates a
greater than 1% change
quantity demanded
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When ia demand curve
income inelastic?
When a 1% change in
income generates a less
than 1% change
quantity demanded
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What is an
Inferior Good?
A good that people
buy less of as their
incomes increase
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What is a
Normal Good?
A good that people buy
more of as their incomes
increase
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What is Price Elasticity
of Supply?
The ratio of the percentage
change in quantity
supplied to the percentage
change in price
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Does time effect Supply
Elasticities?
Yes! The more time,
the more elastic the
supply curve
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Which type of good
would be best to tax to
raise the most revenue?
Goods with inelastic demand
curves
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What does the Tobacco
Resource Center do to
increase the elasticity of
demand for cigarettes?
http://www.tobacco.neu.edu/
©1999 South-Western College Publishing
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• What factors influence Demand
Sensitivity?
• What is Elasticity?
• How do we measure the Price
Elasticity of Demand?
• What is Cross Elasticity of
Demand?
• What is Income Elasticity of
Demand?
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END
©1999 South-Western College Publishing
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