elasticity. measures how much buyers and sellers respond to a change in market conditions – price...
TRANSCRIPT
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Elasticity
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Elasticity• Measures how much buyers and
sellers respond to a change in market conditions–Price changes–Income Changes–All other market changes
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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
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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
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Factors that determine elasticity for Demand
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Amount of Substitutes
The less substitutes there are…
The more substitutes there are…
Inelastic Elastic
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Necessities vs. Luxuries
Your needs
ElasticInelastic
Your luxuries or wants
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Definition of the Market
Broadly Defined Market
ElasticInelastic
Narrowly Defined Market
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Broadly Defined Market
ElasticInelastic
Narrowly Defined Market
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Factors that determine elasticity of Supply
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The type of resources that are used to produce the product play a major role in the elasticity of the good or
service
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Resources and ElasticityThe 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.
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BRAIN BUSTA!Think of an apple. What is the major resource that determines whether an apple is elastic or inelastic?
TIME!
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Short Run vs. Long Run Elasticity
Short Run
• Supply is usually inelastic
Long Run
• Supply is usually elastic
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Also, any factors that impact the factors of production can effect
elasticity of supply
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Is the supply inelastic or elastic?
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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
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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.
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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.
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Calculating Elasticity
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% Change in Quantity
% Change in Price
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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
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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
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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
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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.
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Midpoint Method (arc method)
• Used to identify % change
2 1 2 1
2 1 2 1
( ) /[( ) / 2]Price elasticity of demand =
( ) /[( ) / 2]
Q Q Q Q
P P P P
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Computing by looking at market graph
Price Elasticity = 3 (ignore all negatives)
Demand is price elastic.
$5
4Demand
Quantity1000 50
Price
Let’s say the price drops from $5 to $4. Is this good price elastic or price inelastic at that price change?
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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?
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Elasticity and Graphing
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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.
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The Price Elasticity of Demand(a) Perfectly Inelastic Demand: Elasticity Equals 0
$5
4
Quantity
Demand
1000
1. Anincreasein price . . .
2. . . . leaves the quantity demanded unchanged.
Price
Challenge: When can this happen?
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No substitutes!!
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The Price Elasticity of Demand(e) Perfectly Elastic Demand: Elasticity Equals Infinity
Quantity0
Price
$4 Demand
2. At exactly $4,consumers willbuy any quantity.
1. At any priceabove $4, quantitydemanded is zero.
3. At a price below $4,quantity demanded is infinite.
Challenge: When can this happen?
(immeasurable)
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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.
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ALL of the same rules apply when looking at supply!
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Owner Challenge!!!
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Looking at the information on the next slide, at what price would you
earn the most revenue?
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Price Demand for Beef Jerky
Purse
Total Revenue
$1 15
$2 10
$3 8
$4 4
$5 1
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Do this!
Total Revenue
Quantity DemandedPrice
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Price Demand for Beef Jerky
Purse
Total Revenue
$1 15
$2 10
$3 8
$4 4
$5 1
$15
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Price Demand for Beef Jerky
Purse
Total Revenue
$1 15 $15
$2 10 $20
$3 8 $24
$4 4 $16
$5 1 $5
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Graphing Total Revenue
Demand
Quantity
Q
P
0
Price
P × Q = $400(revenue)
$4
100
When the price is $4, consumers will demand 100 units, and spend $400 on this good.
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Inelastic Goods and Total Revenue
• With an inelastic demand curve, total revenue usually increases as price increases.
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How Total Revenue Changes When Price Changes: Inelastic Demand
Demand
Quantity0
Price
Revenue = $100
Quantity0
Price
Revenue = $240
Demand$1
100
$3
80
An Increase in price from $1 to $3 …
… leads to an Increase in total revenue from $100 to $240
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Elastic Goods and Total Revenue
• With an elastic demand curve, total revenue usually decreases as price increases.
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How Total Revenue Changes When Price Changes: Elastic Demand
Demand
Quantity0
Price
Revenue = $200
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
An Increase in price from $4 to $5 …
… leads to an decrease in total revenue from $200 to $100
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0 2 64 108 12 14
2
1
4
3
5
6
$7
Demand is elastic; demand is responsive to changes in price.
Demand is inelastic; demand is not very responsive to changes in price.
When price increases from $4 to $5, TR declines from $24 to $20.
When price increases from $2 to $3, TR increases from $20 to $24.
Elasticity is > 1 in this range.
Elasticity is < 1 in this range.
Price
Quantity
Price Range and Elasticity
The higher the price, the more elastic the good is. The lower the price, the
more inelastic the good is.
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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.
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Other Demand Elasticities
In co m e e la stic ity o f d em an d =
P ercen tag e ch an g e in q u an tity d em an d ed
P ercen tag e ch an g e in in co m e
Remember, all elasticities are measured by dividing one percentage change by another
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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.
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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
2 good of pricein %change
1 good of demandedquantity in %changedemand of elasticity price-Cross
Compares the elasticities of compliment and substitute goods
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• 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
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• 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
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• 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.
ELASTICITY REVIEW