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Transcript 
Elasticity Overview
Macroeconomics of Agriculture
AGEC 430
Spring 2010
Market Equilibrium
Price
S
D
Initial market
equilibrium
Pe
Qe
Quantity
Demand/Supply Model
Demand equation:
Qd = a0 - a1(Price) +  ai (demand shifters)
Supply equation:
Qs = b0 +b1(price) +  bi (supply shifters)
Market equilibrium:
Qd = Qs
To forecast price, substitute demand and supply definitions into
the equation for market equilibrium and solve for price.
Concept of Elasticity
Demand elasticities
Own price elasticity = %Q/ %P
Income elasticity = %Q/ %Y
Cross Price elasticity = %Q/ %Px
Related concept
Price flexibility = %P/ %Q
Elastic Demand Curve
Price
c
Drop in
price
Pb
Brings about a larger
increase in the quantity
demanded
Pa
0
Qb
Qa
Quantity
Elastic Demand Curve
Price
c
Pb
Producer revenue
increases since %P
is less that %Q.
a
b
Pa
0
Qb
Qa
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa.
Quantity
Elastic Demand Curve
Price
c
Pb
Producer revenue
increases since %P
is less that %Q.
a
b
Pa
0
Qb
Qa
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa.
Quantity
Elastic Demand Curve
Price
c
Pb
Producer revenue
increases since %P
is less that %Q.
a
b
Pa
0
Qb
Qa
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa.
Quantity
Inelastic Demand Curve
Price
Pb
Drop in
price
Pa
Brings about a smaller
increase in the quantity
demanded
Qb Qa
Quantity
Inelastic Demand Curve
Price
Pb
Pa
a
b
Producer revenue
falls since %P is
greater than %Q.
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa.
0
Qb Qa
Quantity
Inelastic Demand Curve
Price
Pb
Pa
a
b
Producer revenue
falls since %P is
greater than %Q.
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa.
0
Qb Qa
Quantity
Revenue Implications
Own-price
elasticity is:
A drop in the
price will:
An increase
in price will:
Elastic
Increase
revenue
Decrease
revenue
Unitary
elastic
Not change
revenue
Not change
revenue
Inelastic
Decrease
revenue
Increase
revenue
Revenue Implications
Own-price
elasticity is:
A drop in the
price will:
An increase
in price will:
Elastic
Increase
revenue
Decrease
revenue
Unitary
elastic
Not change
revenue
Not change
revenue
Inelastic
Decrease
revenue
Increase
revenue
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