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Transcript
Elasticity
chapter 20
How do I know how much quantity
demanded changes when price
changes???????
Elasticity
 Def-responsiveness to change
 How responsive is demand to a change in price?
 How responsive is supply to a change in price?
 Depends on:
 Number of substitutes
 More substitutes---more elastic
 Income
 Larger % of budget---more elastic
 Necessity vs. luxury
 Bread/milk--inelastic
 Time
 Short term—inelastic
 Long term-elastic—find substitutes
How to figure out
Elasticity?
Ed =



Midpoint Formula
Change in Qd
(Q1 +Q2) divided by 2



Divided by
Change in price
(p1 + p2) divided by 2
Percentage change in quantity
demanded of product X
Percentage change in price
of product X
Perfectly Inelastic
Perfectly Elastic
Elasticity as a Range





The higher the pricethe more elastic
The lower the
price—
the less elastic
Total Revenue Test
Elastic-if price increases—total revenue decreases
Inelastic-If price increases—total revenue increases
Income Elasticity of
Demand
 % change in Qd
 % change in Income
 Income increases----causes increase in
Qd---normal good
 Income increases—causes a decrease in
Qd—inferior goods
Cross Elasticity Of
Demand
 % change in Qd of product X
 %change in Qd of product Y
 If complements—negative #
 If substitutes—positive #
Price Elasticity of Supply
 %change in Qs
 %change in price




Key issue-time
Market period
Short run
Long run
PRICE ELASTICITY OF SUPPLY
P
Immediate Market period
An increase in
Sm
Pm
demand without
enough time to
change supply
causes… an
increase in price
Po
D2
D1
Qo
Q
PRICE ELASTICITY OF SUPPLY
Short Run
P
Ss
An increase in
demand with
less intensity
supply use
causes...a lower
increase in price
Ps
Po
D2
D1
QoQs
Q
PRICE ELASTICITY OF SUPPLY
Long Run
An increase in
demand in the
long run allows
greater change
causing...
SL
P
PL
Po
Even more elastic
response - less
price increase
D2
D1
Qo
QL
Q