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Ch. 3 Elasticity

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20 views26 pages

Ch. 3 Elasticity

Uploaded by

elmorris91
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 3

Elasticity

Prepared by Murray Davidson, Centennial College.

© 2020 by McGraw-Hill Education Ltd. 1


Learning Objectives
After this chapter, you will be able to:

 Describe price elasticity of demand, its


relation to other demand elasticities, and
its impact on sellers’ revenues
 Define price elasticity of supply and the links
between production periods and supply

© 2020 by McGraw-Hill Education Ltd. 2


Elastic and Inelastic Demand
Price elasticity of demand shows how responsive
consumers are to price changes.

 Elastic demand means the % change in QD is


more than the % change in price
 Inelastic demand means the % change in Q is
D
less than the % change in price.
 Unit-elastic demand means the % change in

QD equals the % change in price.


© 2020 by McGraw-Hill Education Ltd. 3
Elastic and Inelastic Demand (a)
FIGURE 3.1

© 2020 by McGraw-Hill Education Ltd. 4


Elastic and Inelastic Demand (b)
FIGURE 3.1

For the elastic demand curve (D1) shown on the left


graph, a 20 percent increase in price leads to a
greater 50 percent decrease in quantity demanded.

The graph on the right shows an inelastic demand


curve (D2). The same 20 percent increase in price
now leads to a smaller 10 percent decrease in
quantity demanded.

© 2020 by McGraw-Hill Education Ltd. 5


Perfectly Elastic and Perfectly
Inelastic Demand (a)
 Perfectly elastic demand means a constant price
and a horizontal demand curve (at any price other
price, the demand = 0).

 Perfectly inelastic demand means a constant


quantity demanded and a vertical demand curve
(demand is always the same irrespective of price).

© 2020 by McGraw-Hill Education Ltd. 6


Perfectly Elastic and Perfectly
Inelastic Demand FIGURE 3.2

© 2020 by McGraw-Hill Education Ltd. 7


Impact on Total Revenue
 When demand is elastic, a price change causes total
revenue to change in the opposite direction.

 When demand is inelastic, a price change causes


total revenue to change in the same direction.

 A price change does not affect total revenue when


demand is unit-elastic.

© 2020 by McGraw-Hill Education Ltd. 8


Revenues
Revenuewith Elastic
Changes Demand
with Elastic
Figure 3.3 Page 63
Demand
FIGURE 3.3

© 2020 by McGraw-Hill Education Ltd. 9


Revenues
Revenuewith Inelastic
Changes Demand
with Inelastic
Figure 3.4 Page 64
Demand
FIGURE 3.4

© 2020 by McGraw-Hill Education Ltd. 10


© 2020 by McGraw-Hill Education Ltd. 11
Factors That Affect Price Elasticity
of Demand
There are four factors of price elasticity of
demand:
 portion of consumer incomes (products with

smaller portions are more inelastic)


 access to substitutes (products with more

substitutes are more elastic)


 necessities versus luxuries (more inelastic for

necessities and more elastic for luxuries)


 time (more elastic with the passage of time)

© 2020 by McGraw-Hill Education Ltd. 12


Calculating Demand Elasticity
 A numerical value for price elasticity of demand (ed)
is found by taking the ratio of the changes in
quantity demanded and in price, each divided by its
average value.
 In mathematical terms:

ed = ΔQd ÷ average Qd
Δprice ÷ average price

© 2020 by McGraw-Hill Education Ltd. 13


Calculating Demand Elasticity

© 2020 by McGraw-Hill Education Ltd. 14


Calculating Demand Elasticity

© 2020 by McGraw-Hill Education Ltd. 15


Income Elasticity of Demand
 Income elasticity (ei) is the responsiveness of a
product’s quantity demanded to changes in
consumer income.

 In mathematical terms:
ei = ΔQd ÷ average Qd
ΔI ÷ average I
or:
ei = % ΔQd / % ΔI
© 2020 by McGraw-Hill Education Ltd. 16
Cross-Price Elasticity
 Cross-price elasticity (ei) is the responsiveness of
the quantity demanded of one product (x) to a
change in price of another (y).

 In mathematical terms:
exy = ΔQd ÷ average Qd
ΔPy ÷ average Py
or:
exy = ΔQd / ΔPy
© 2020 by McGraw-Hill Education Ltd. 17
Elasticity in Financial Markets
Interest rate elasticity of savings - the percentage change
in the quantity of savings divided by the percentage change
in interest rates.

% change in quantity of financial savings


% change in interest rate

Interest rate elasticity of borrowing - the percentage


change in the quantity of borrowing divided by the
percentage change in interest rates.

% change in quantity of financial borrowing


% change in interest rate
© 2020 by McGraw-Hill Education Ltd. 18
Price Elasticity of Supply
Price elasticity of supply measures the
responsiveness of quantity supplied to price changes.

 Elastic supply means the % change in Qs is more


than the % change in price.

 Inelastic supply means the % change in Qs is less


than the % change in price.

© 2020 by McGraw-Hill Education Ltd. 19


Elastic and Inelastic Supply (a)
FIGURE 3.7

© 2020 by McGraw-Hill Education Ltd. 20


Elastic and Inelastic Supply (b)
An elastic supply curve (S1) is shown on the left. A
50 percent increase in price leads to a greater 100
percent increase in quantity supplied.

The graph on the right shows an inelastic demand


curve (S2). The same 50 percent increase in price
now leads to a smaller 20 percent increase in
quantity supplied.

© 2020 by McGraw-Hill Education Ltd. 21


Factors That Affect Price Elasticity of
Supply
The main factor that affects the price elasticity of
supply is the passage of time.

 Immediate-Run
 Short-Run
 Long-Run

© 2020 by McGraw-Hill Education Ltd. 22


Perfectly Elastic and Perfectly
Inelastic Supply
 In long-run, supply may be perfectly elastic.
Perfectly elastic supply means a constant price and
a horizontal supply curve.

 In immediate-run, supply is perfectly inelastic.


Perfectly inelastic supply means a constant quantity
supplied and a vertical supply curve.

 In short-run, supply can be either elastic or


inelastic.

© 2020 by McGraw-Hill Education Ltd. 23


© 2020 by McGraw-Hill Education Ltd. 24
Calculating Price Elasticity of
Supply
 A numerical value for price elasticity of supply (es) is
found by taking the ratio of the changes in quantity
supplied and in price, each divided by its average
value.
 In mathematical terms:

es = ΔQs ÷ average Qs
Δprice ÷ average price
or:
es = % ΔQs / % ΔP

© 2020 by McGraw-Hill Education Ltd. 25


Conclusion
 Defined price elasticity of demand, its relation to
other elasticities of demand, and its impact on
sellers’ revenues.

 Described price elasticity of supply and the links


between supply and production periods.

© 2020 by McGraw-Hill Education Ltd. 26

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