Download What Affects Elasticity?

Elasticity
Elasticity
• Measures how much buyers and
sellers respond to a change in
market conditions
–Price changes
–Income Changes
–All other market changes
Elastic Good
• The change in quantity is more
than the change in the market
• Quantity for a good is
substantially impacted by a
change in market conditions
Inelastic Good
• The change in quantity is less
than the change in the market
• Quantity for a good is not
substantially impacted by a
change in market conditions
Factors that determine
elasticity for Demand
Amount of Substitutes
The less substitutes
there are…
Inelastic
The more substitutes
there are…
Elastic
Necessities vs. Luxuries
Your needs
Your luxuries or
wants
Inelastic
Elastic
Definition of the Market
Broadly Defined
Market
Narrowly Defined
Market
Inelastic
Elastic
Broadly Defined
Market
Narrowly Defined
Market
Inelastic
Elastic
Factors that determine
elasticity of Supply
The type of resources that are used
to produce the product play a major
role in the elasticity of the good or
service
Resources and Elasticity
The harder the good or
service is to produce, the
more inelastic it is
The easier the good or
service is to produce, the
more elastic it is.
BRAIN BUSTA!
Think of an apple. What is the major resource that
determines whether an apple is elastic or inelastic?
TIME!
Short Run vs. Long Run Elasticity
Short Run
Long Run
• Supply is
• Supply is
usually inelastic usually elastic
Also, any factors that impact the
factors of production can effect
elasticity of supply
Is the supply inelastic or elastic?
Price Elasticity
• A measure of how much quantity of
a good responds to a change in the
price of that good. In other words,
the price change is the “change in
the market.”
–Price Elasticity of Demand
• How quantity demanded is impacted
–Price Elasticity of Supply
• How quantity supply is impacted
For example
• Since the price of gasoline changes all the
time but the quantity demanded for gasoline
stays almost always the same, gasoline is price
inelastic.
Partner Activity
• On a separate sheet of paper, write down
any good or service you can think of.
• Then, specify whether the price increases
or decreases
• Exchange your paper with another group
• Now, identify the price elasticity of
supply and demand. Also, explain your
answer. Write your names on the sheet
that you answered.
Calculating Elasticity
% Change in Quantity
% Change in Price
Inelastic or Elastic?
•
•
•
•
•
If elasticity is greater than 1 = elastic
If elasticity is less than 1 = inelastic
If elasticity is 1 = unit elastic
If elasticity is 0 = perfectly inelastic
If elasticity is infinite = perfectly
elastic
What do they mean?
• Perfectly Inelastic
– Quantity stays the same no matter the price
change.
• Perfectly Elastic
– Quantity changes infinitely with any change
in price.
• Unit Elastic
– The percent change in quantity = the
percent change in price
Practice
• The price of an ice cream cone increases by
40% and the amount the market buys falls by
60%
• Compute the price elasticity of ice cream
cones
• What is the price elasticity?
Elasticity = 1.5, therefore ice
cream is elastic
Another way to look at this…
• The price of an ice cream cone increases by
40% and the amount the market buys falls by
60%
Since the percent change in quantity is
greater than the percent change in price, we
can assume the good is elastic.
Midpoint Method (arc method)
• Used to identify % change
(Q2  Q1 ) /[(Q2  Q1 ) / 2]
ity of demand =
( P2  P1 ) /[( P2  P1 ) / 2]
Computing by looking at market graph
Let’s say the price drops from $5 to
$4. Is this good price elastic or price
inelastic at that price change?
Price
$5
4
Demand
Price Elasticity = 3 (ignore all negatives)
Demand is price elastic.
0
50
100 Quantity
Worksheet Bonus Questions
1. At what price range is the good inelastic?
2. At what price range is the good elastic?
3. Why do you think this happens?
Elasticity and Graphing
Challenge
• Graph a typical demand curve for gasoline in
the United States of America
• Graph a typical demand curve for Levi’s jeans.
• Graph a typical supply curve for doctors.
Challenge:
When can of
thisDemand
happen?
The
Price Elasticity
(a) Perfectly Inelastic Demand: Elasticity Equals 0
Price
Demand
$5
4
1. An
increase
in price . . .
0
100
2. . . . leaves the quantity demanded unchanged.
Quantity
No substitutes!!
Challenge:
When can of
thisDemand
happen?
The
Price Elasticity
(e) Perfectly Elastic Demand: Elasticity Equals Infinity
Price
1. At any price
above $4, quantity
demanded is zero.
$4
Demand
2. At exactly $4,
consumers will
buy any quantity.
0
3. At a price below $4,
(immeasurable)
quantity demanded is infinite.
Quantity
Super Duper Paper Clip Company
• Many other companies that sell the exact
same product
• If price is raised by the smallest amount, than
buyers buy from another company
• If price is slightly lowered, than all buyers will
buy from Super Duper Paper Clip Company.
ALL of the same rules apply when
looking at supply!
Owner Challenge!!!
Looking at the information on the
next slide, at what price would you
earn the most revenue?
Price
$1
Demand for
Beef Jerky
Purse
15
$2
10
$3
8
$4
4
$5
1
Total Revenue
Do this!
Total Revenue
Price
Quantity
Demanded
Price
$1
Demand for
Beef Jerky
Purse
15
$2
10
$3
8
$4
4
$5
1
Total Revenue
$15
Price
Total Revenue
$1
Demand for
Beef Jerky
Purse
15
$2
10
$20
$3
8
$24
$4
4
$16
$5
1
$5
$15
Graphing Total Revenue
Price
When the price is $4, consumers will
demand 100 units, and spend $400 on
this good.
$4
P × Q = $400
(revenue)
P
0
Demand
100
Q
Quantity
Inelastic Goods and Total Revenue
• With an inelastic demand curve, total revenue
usually increases as price increases.
How Total Revenue Changes When
Price Changes: Inelastic Demand
Price
Price
An Increase in price from $1
to $3 …
… leads to an Increase in total
revenue from $100 to $240
$3
Revenue = $240
$1
Demand
Revenue = $100
0
100
Quantity
Demand
0
80
Quantity
Elastic Goods and Total Revenue
• With an elastic demand curve, total revenue
usually decreases as price increases.
How Total Revenue Changes When
Price Changes: Elastic Demand
Price
Price
An Increase in price from $4
to $5 …
… leads to an decrease in total
revenue from $200 to $100
$5
$4
Demand
Demand
Revenue = $200
0
Revenue = $100
50
Quantity
0
20
Quantity
Price Range and Elasticity
When price increases from $4
Demand is elastic; demand
is responsive to changestoin$5, TR declines from $24
to $20.
price.
Elasticity is > 1 in
this range.
Price
$7
6
5
The higher the price,
the
more
elastic
Elasticity
is < is1inelastic;
in this demand
range.is not
Demand
very the
responsive
to changes inthe
price.
the good is. The lower
price,
When price increases from $2
to $3, TR increases from $20
more inelastic the good
is.
to $24.
4
3
2
1
0
2
4
6
8
10
12
14
Quantity
Other Demand Elasticities
• Income Elasticity of Demand
– Income elasticity of demand measures how much
the quantity demanded of a good responds to a
change in consumers’ income.
Other Demand Elasticities
Percentage change
in quantity demanded
Income elasticity of demand =
Percentage change
in income
Remember, all elasticities are measured by
dividing one percentage change by
another
Income Elasticity differences
• Income Elasticity
– Necessities, such as food and clothing, tend to
have small income elasticities.
– Luxuries, such as fur coats and diamonds, tend to
have large income elasticities.
Other Demand Elasticities
• Cross-price elasticity of demand
– A measure of how much the quantity
demanded of one good responds to a change
in the price of another good
Cross - price elasticity of demand 
%change in quantity demanded of good 1
%change in price of good 2
Compares the elasticities of
compliment and substitute goods
ELASTICITY REVIEW
• Price elasticity of demand measures how
much the quantity demanded responds to
changes in the price.
• Price elasticity of demand is calculated as the
percentage change in quantity demanded
divided by the percentage change in price.
– If a demand curve is elastic, total revenue falls
when the price rises.
– If it is inelastic, total revenue rises as the price
rises.
ELASTICITY REVIEW
• The income elasticity of demand measures
how much the quantity demanded responds
to changes in consumers’ income.
• The cross-price elasticity of demand measures
how much the quantity demanded of one
good responds to the price of another good.
• The price elasticity of supply measures how
much the quantity supplied responds to
changes in the price.
ELASTICITY REVIEW
• In most markets, supply is more elastic in the
long run than in the short run.
• The price elasticity of supply is calculated as
the percentage change in quantity supplied
divided by the percentage change in price.
• The tools of supply and demand can be
applied in many different types of markets.