economics for managers gtu mba sem 1 chapter 05
TRANSCRIPT
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
1/38
Elasticity and Its
Application
Chapter 5
Author:
Prof. Sharif S. Memon
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
2/38
Elasticity . . .
is a measure of how much buyers and
sellers respond to changes in marketconditions
allows us to analyze supply and
demand with greater precision.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
3/38
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
4/38
Determinants of
Price Elasticity of Demand
Necessities versus Luxuries
Availability of Close Substitutes
Definition of the Market
Time Horizon
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
5/38
Determinants of
Price Elasticity of DemandDemand tends to be more elastic :
if the good is a luxury.the longer the time period.
the larger the number of close
substitutes. the more narrowly defined the market.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
6/38
Computing the Price Elasticity
of DemandThe price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by the percentagechange in price.
Price Elasticity of Demand =
Percentage Change
in Quantity DemandedPercentage Change
in Price
Price Elasticity of Demand =
Percentage Change
in Quantity DemandedPercentage Change
in Price
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
7/38
Computing the Price Elasticity
of Demand
priceinchangePercentage
demandedquatityinchangePercentagedemandofelasticityPrice
Example: If the price of an ice cream cone increasesfrom $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your elasticity of demand would be
calculated as:
2percent10
percent20
100
002
002202
10010
810
.
)..(
)(
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
8/38
Computing the Price Elasticity of
Demand Using the Midpoint
Formula
The midpoint formula is preferable when
calculating the price elasticity of demandbecause it gives the same answer regardless
of the direction of the change.
)/2]P)/[(PP(P
)/2]Q)/[(QQ(Q=DemandofElasticityPrice
1212
1212
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
9/38
Computing the Price Elasticity
of Demand
Example: If the price of an ice cream cone increasesfrom $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones the your elasticity of demand, using the
midpoint formula, would be calculated as:
32.25.9
22
2/)20.200.2(
)00.220.2(
2/)810()810(
percent
percent
)/2]P)/[(PP(P
)/2]Q)/[(QQ(Q=DemandofElasticityPrice
1212
1212
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
10/38
Ranges of Elasticity
Inelastic DemandQuantity demandeddoes not respondstrongly to
price changes.Price elasticity of demand is less than one.
Elastic Demand
Quantity demandedresponds strongly to changesin price.
Price elasticity of demand isgreater than one.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
11/38
Computing the Price Elasticity
of Demand
Demand is price elastic
$5
4 Demand
Quantity1000
Price
50
-3percent22-
percent67
5.00)/2(4.00
5.00)-(4.00
50)/2(10050)-(100
ED
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
12/38
Ranges of Elasticity
Perfectly InelasticQuantity demanded does not respond to price
changes.Perfectly ElasticQuantity demanded changes infinitely with any
change in price.
Unit ElasticQuantity demanded changes by the same
percentage as the price.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
13/38
A Variety of Demand Curves
Because the price elasticity
of demand measures howmuch quantity demanded
responds to the price, it is
closely related to the slope ofthe demand curve.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
14/38
Perfectly Inelastic Demand
- Elasticity equals 0
Quantity
Price
4
$5
Demand
1002. ...leaves the quantity demanded unchanged.
1. Anincreasein price...
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
15/38
Inelastic Demand- Elasticity is less than 1
Quantity
Price
4
$51. A 22%increasein price...
Demand
100902. ...leads to a 11% decrease in quantity.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
16/38
Unit Elastic Demand
- Elasticity equals 1
Quantity
Price
4
$51. A 22%increasein price...
Demand
100802. ...leads to a 22% decrease in quantity.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
17/38
Elastic Demand- Elasticity is greater than 1
Quantity
Price
4
$51. A 22%increasein price...
Demand
100502. ...leads to a 67% decrease in quantity.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
18/38
Perfectly Elastic Demand
- Elasticity equals infinity
Quantity
Price
Demand$4
1. At any priceabove $4, quantity
demanded is zero.
2. At exactly $4,
consumers willbuy any quantity.
3. At a price below $4,quantity demanded is infinite.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
19/38
Elasticity and Total Revenue
Total revenueis the amount paid by
buyers and received by sellers of a good.
Computed as the price of the good timesthe quantity sold.
TR = P x Q
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
20/38
$4
Demand
Quantity
P
0
Price
P xQ= $400
(total revenue)
100Q
Elasticity and Total Revenue
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
21/38
Elasticity and Total Revenue
With an inelastic demand
curve, an increase in price
leads to a decrease in quantitythat is proportionately
smaller. Thus, total revenue
increases.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
22/38
Elasticity and Total Revenue:
Inelastic Demand
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
leads to an increase
in total revenue
from$100 to $240
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
23/38
Elasticity and Total Revenue
With an elastic demand curve,
an increase in the price leads to
a decrease in quantity demandedthat is proportionately larger.
Thus, total revenue decreases.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
24/38
Elasticity and Total Revenue:
Elastic Demand
Demand
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
Revenue = $200
An increase in price
from $4 to $5...
leads to a decrease
in total revenue
from$200 to $100
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
25/38
Income Elasticity of Demand
Income elasticity of demand measures
how much the quantity demanded of a
good responds to a change in consumersincome.
It is computed as the percentage change
in the quantity demanded divided by thepercentage change in income.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
26/38
Computing Income Elasticity
Income Elasticity
of DemandPercentage Change
in Quantity DemandedPercentage Change
in Income=
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
27/38
Income Elasticity
- Types of Goods -Normal Goods
Inferior Goods
Higher incomeraises the quantity
demanded fornormal goodsbut lowers
the quantity demanded forinferior
goods.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
28/38
Income Elasticity
- Types of Goods -Goods consumers regard as necessities
tend to beincome inelastic
Examples include food, fuel, clothing, utilities,and medical services.
Goods consumers regard as luxuries tend
to beincome elastic.Examples include sports cars and expensivefoods.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
29/38
Price Elasticity of Supply
Price elasticity of supply is the
percentage change in quantity supplied
resulting from a percent change in price.It is a measure of how much the quantity
supplied of a good responds to a change
in the price of that good.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
30/38
Ranges of Elasticity
Perfectly Elastic
ES=
Relatively Elastic
ES> 1
Unit ElasticES= 1
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
31/38
Ranges of Elasticity
Relatively Inelastic
ES< 1
Perfectly Inelastic
ES= 0
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
32/38
Perfectly Inelastic Supply- Elasticity equals 0
Quantity
Price
4
$5
Supply
1002. ...leaves the quantity supplied unchanged.
1. Anincreasein price...
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
33/38
Inelastic Supply- Elasticity is less than 1
Quantity
Price
4
$51. A 22%increasein price...
110100
Supply
2. ...leads to a 10% increase in quantity.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
34/38
Unit Elastic Supply- Elasticity equals 1
Quantity
Price
4
$51. A 22%increasein price...
125100
Supply
2. ...leads to a 22% increase in quantity.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
35/38
Elastic Supply- Elasticity is greater than 1
Quantity
Price
4
$51. A 22%increasein price...
200100
Supply
2. ...leads to a 67% increase in quantity.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
36/38
Perfectly Elastic Supply- Elasticity equals infinity
Quantity
Price
Supply$4
1. At any priceabove $4, quantity
supplied is infinite.
2. At exactly $4,
producers willsupply any quantity.
3. At a price below $4,quantity supplied is zero.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
37/38
Determinants of
Elasticity of SupplyAbility of sellers to change the amount of
the good they produce.
Beach-front land is inelastic.Books, cars, or manufactured goods are
elastic.
Time period.Supply is more elastic in the long run.
-
7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 05
38/38
Computing the Price Elasticity
of SupplyThe price elasticity of supply is
computed as the percentage change
in the quantity supplied divided bythe percentage change in price.
Elasticity of Supply =Percentage Change inQuantity Supplied
Percentage Changein Price
Elasticity of Supply =Percentage Change inQuantity Supplied
Percentage Changein Price