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1、1 of 45SUMMARYchapter: 62009 Worth PublishersElasticity2 of 45WHAT YOU WILL LEARN IN THIS CHAPTERWhat is the definition of elasticity?What is the meaning and importance of:price elasticity of demand?income elasticity of demand?price elasticity of supply?What factors influence the size of these vario
2、us elasticities?How the cross-price elasticity of demand measures the responsiveness of demand for one good to changes in the price of another good3 of 45Defining and Measuring ElasticityThe price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change
3、in the price as we move along the demand curve (dropping the minus sign).4 of 45The Price Elasticity of Demand5 of 45Demand for VaccinationsWhen price rises to $21 per barrel, world demand falls to 9.9 million barrels per day (point B).D10.09.9$2120Price of vaccination0Quantity of vaccinations (mill
4、ions)BA6 of 45Calculating the Price Elasticity of Demand 7 of 45Using the Midpoint MethodThe midpoint method is a technique for calculating the percent change. In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values.8 of 45Using t
5、he Midpoint Method9 of 45Using the Midpoint Method10 of 45Some Estimated Price Elasticities of DemandGood Price elasticityInelastic demandEggs 0.1Beef 0.4Stationery0.5Gasoline 0.5Elastic demandHousing 1.2Restaurant meals 2.3Airline travel 2.4Foreign travel 4.1Price elasticity of demand111 of 45Inter
6、preting the Price Elasticity of DemandTwo Extreme Cases of Price Elasticity of Demand:Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line.Demand is perfectly elastic when any
7、 price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line.12 of 45Two Extreme Cases of Price Elasticity of DemandD1 leaves the quantity demanded unchanged.An increase in price10Quantity of shoelaces (billions of pairs pe
8、r year)(a) Perfectly Inelastic Demand: Price Elasticity of Demand = 0$3$2Price of shoelaces (per pair)13 of 45Two Extreme Cases of Price Elasticity of DemandAt any price above $5, quantity demanded is zeroAt exactly $5, consumers will buy any quantityAt any price below $5, quantity demanded is infin
9、iteD2(b)0Price Elastic Demand: Price Elasticity of Demand = $5Price of pink tennis balls (per dozen)Quantity of tennis balls (dozens per year)14 of 45Interpreting the Price Elasticity of DemandDemand is elastic if the price elasticity of demand is greater than 1.Demand is inelastic if the price elas
10、ticity of demand is less than 1.Demand is unit-elastic if the price elasticity of demand is exactly 1.15 of 45Unit Elasticity of DemandA 20% increase in the price . . .D1 . . . generates a 20% decrease in the quantity of crossings demanded.(a) Unit-Elastic Demand: Price Elasticity of Demand = 19001,
11、1000$1.100.90Price of crossingQuantity of crossings (per day)AB16 of 45Inelastic DemandD2 . . . generates a 10% decrease in the quantity of crossings demanded.(b) Inelastic Demand: Price Elasticity of Demand = 0.59501,0500$1.100.90Price of crossingQuantity of crossings (per day)A 20% increase in the
12、 price . . .AB17 of 45Elastic Demand generates a 40% decrease in the quantity of crossings demanded.D3(c) Elastic Demand: Price Elasticity of Demand = 28001,2000$1.100.90Quantity of crossings (per day)Price of crossingA 20% increase in the price . . .BA18 of 45Why Does It Matter Whether Demand is Un
13、it-Elastic, Inelastic, or Elastic?Because this classification predicts how changes in the price of a good will affect the total revenue earned by producers from the sale of that good.The total revenue is defined as the total value of sales of a good or service, i.e.Total Revenue = Price Quantity Sol
14、d19 of 45Total Revenue by AreaDTotal revenue = price x quantity = $9901,1000$0.90Price of crossingQuantity of crossings (per day)20 of 45Elasticity and Total Revenue When a seller raises the price of a good, there are two countervailing effects in action (except in the rare case of a good with perfe
15、ctly elastic or perfectly inelastic demand):A price effect: After a price increase, each unit sold sells at a higher price, which tends to raise revenue.A quantity effect: After a price increase, fewer units are sold, which tends to lower revenue.21 of 45Effect of a Price Increase on Total RevenuePr
16、ice effect of price increase: higher price for each unit soldDQuantity effect of price increase: fewer units soldBCA9001,1000$1.100.90Quantity of crossings (per day)Price of crossing22 of 45Elasticity and Total RevenueIf demand for a good is elastic (the price elasticity of demand is greater than 1)
17、, an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect.If demand for a good is inelastic (the price elasticity of demand is less than 1), a higher price increases total revenue. In this case, the price effect is stronger than the quantity ef
18、fect.If demand for a good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case, the sales effect and the price effect exactly offset each other.23 of 45Price Elasticity of Demand and Total Revenue24 of 45Demand Schedule and Total Rev
19、enueDDemand is elastic: a higher reduces total revenueElasticInelasticUnit-elasticDemand is inelastic: a higher price increase total revenue0012345671098$252421169QuantityTotal revenue012345671098$10987654321QuantityPrice$012345678 910$091621242524211690109876543210Total RevenueQuantity demanded Dem
20、and Schedule and Total Revenue for a Linear Demand CurvePriceThe price elasticity of demand changes along the demand curve25 of 45What Factors Determine the Price Elasticity of Demand?Price Elasticity of Demand is determined by:Whether Close Substitutes Are Available Whether the Good Is a Necessity
21、or a LuxuryShare of Income Spent on the GoodTime 26 of 45How Mad?27 of 45ECONOMICS IN ACTIONResponding to your tuition billTuition has been rising faster than the overall cost of living for years. But does rising tuition keep people from going to college?A 1988 study found that a 3% increase in tuit
22、ion led to an approximately 2% fall in the number of students enrolled at four-year institutions, giving a price elasticity of demand of 0.67 (2%/3%) and 0.9 for two-year institutions.Enrollment decision for students at two-year colleges was significantly more responsive to price than for students a
23、t four-year colleges. The result: students at two-year colleges are more likely to forgo getting a degree because of tuition costs than students at four year colleges.A 1999 study confirmed this pattern.28 of 45OTHER DEMAND ELASTICITIES: CROSS-PRICE ELASTICITY The cross-price elasticity of demand be
24、tween two goods measures the effect of the change in one goods price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good divided by the percent change in the other goods price.The Cross-Price Elasticity of Demandbetween Goods A and B29 o
25、f 45Cross-Price ElasticityGoods are substitutes when the cross-price elasticity of demand is positive. Goods are complements when the cross-price elasticity of demand is negative.30 of 45The Income Elasticity of DemandThe income elasticity of demand is the percent change in the quantity of a good de
26、manded when a consumers income changes divided by the percent change in the consumers income.31 of 45Normal Goods and Inferior GoodsWhen the income elasticity of demand is positive, the good is a normal good - that is, the quantity demanded at any given price increases as income increases.When the i
27、ncome elasticity of demand is negative, the good is an inferior good - that is, the quantity demanded at any given price decreases as income increases.32 of 45FOR INQUIRING MINDSWhere Have All the Farmers Gone?Why do so few people now live and work on farms in the United States?1) The income elastic
28、ity of demand for food is much less than 1it is income inelastic. As consumers grow richer, other things equal, spending on food rises less than income as the U.S. economy has grown, the share of income it spends on foodand therefore the share of total U.S. income earned by farmershas fallen.2) Agri
29、culture has been a technologically progressive sector for approximately 150 years in the U.S., with steadily increasing yields over time. Competition among farmers means that technological progress leads to lower food prices. Meanwhile, the demand for food is price-inelastic, so falling prices of ag
30、ricultural goods, other things equal, reduce the total revenue of farmers progress in farming has been good for consumers but bad for farmers.33 of 45GLOBAL COMPARISONFoods Bite in World Budgets2004060100%Income (% of U.S. income per capital)8080%604020Spending on food (% of income) Sri LankaMexicoI
31、sraelUnited States34 of 45Measuring the Price Elasticity of SupplyThe price elasticity of supply is a measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we mo
32、ve along the supply curve. 35 of 45Two Extreme Cases of Price Elasticity of Supply(b)Perfectly Elastic Supply: Price Elasticity of Supply = 0Quantity of pizzas$12Price of pizzaS1(a)Perfectly Inelastic Supply: Price Elasticity of Supply = 01000Quantity of cell phone frequencies$3,0002,000Price of cel
33、l phone frequency leaves the quantity supplied unchangedS2At any price above $12, quantity supplied is infinite.At exactly $12, producers will produce any quantityAt any price below $12, quantity supplied is zero.An increase in price36 of 45Two Extreme Cases of Price Elasticity of SupplyThere is per
34、fectly inelastic supply when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply curve is a vertical line.There is perfectly elastic supply when even a tiny increase or reduction in the price will lead
35、 to very large changes in the quantity supplied, so that the price elasticity of supply is infinite. A perfectly elastic supply curve is a horizontal line.37 of 45What Factors Determine the Price Elasticity of Supply?The Availability of Inputs: The price elasticity of supply tends to be large when i
36、nputs are readily available and can be shifted into and out of production at a relatively low cost. It tends to be small when inputs are difficult to obtain.Time: The price elasticity of supply tends to grow larger as producers have more time to respond to a price change. This means that the long-ru
37、n price elasticity of supply is often higher than the short-run elasticity.38 of 45ECONOMICS IN ACTIONEuropean Farm SurplusesImposition of a price floors to support the incomes of farmers has created “butter mountains” and “wine lakes” in Europe.Were European politicians unaware that their price flo
38、ors would create huge surpluses?They probably knew that surpluses would arise, but underestimated the price elasticity of agricultural supply due to availability of inputs.They thought big increases in production were unlikely since there was little new land available in Europe for cultivation. Howe
39、ver, farm production could expand by adding other resources, especially fertilizer and pesticides. So although farm acreage didnt increase much, farm production did!39 of 45An Elasticity Menagerie40 of 45An Elasticity Menagerie41 of 45SUMMARY1.Elasticity is a general measure of responsiveness that c
40、an be used to answer such questions.2.The price elasticity of demandthe percent change in the quantity demanded divided by the percent change in the price (dropping the minus sign)is a measure of the responsiveness of the quantity demanded to changes in the price.3.The responsiveness of the quantity
41、 demanded to price can range from perfectly inelastic demand, where the quantity demanded is unaffected by the price, to perfectly elastic demand, where there is a unique price at which consumers will buy as much or as little as they are offered. When demand is perfectly inelastic, the demand curve
42、is a vertical line; when it is perfectly elastic, the demand curve is a horizontal line.42 of 45SUMMARY4.The price elasticity of demand is classified according to whether it is more or less than 1. If it is greater than 1, demand is elastic; if it is less than 1, demand is inelastic; if it is exactl
43、y 1, demand is unit-elastic. This classification determines how total revenue, the total value of sales, changes when the price changes. 5.The price elasticity of demand depends on whether there are close substitutes for the good, whether the good is a necessity or a luxury, the share of income spen
44、t on the good, and the length of time that has elapsed since the price change.6.The cross-price elasticity of demand measures the effect of a change in one goods price on the quantity of another good demanded. 43 of 45SUMMARY7.The income elasticity of demand is the percent change in the quantity of
45、a good demanded when a consumers income changes divided by the percent change in income. If the income elasticity is greater than 1, a good is income elastic; if it is positive and less than 1, the good is income-inelastic.8.The price elasticity of supply is the percent change in the quantity of a g
46、ood supplied divided by the percent change in the price. If the quantity supplied does not change at all, we have an instance of perfectly inelastic supply; the supply curve is a vertical line. If the quantity supplied is zero below some price but infinite above that price, we have an instance of pe
47、rfectly elastic supply; the supply curve is a horizontal line.44 of 45SUMMARY9.The price elasticity of supply depends on the availability of resources to expand production and on time. It is higher when inputs are available at relatively low cost and the longer the time elapsed since the price change.45 of 45THE END OF CHAPTER 6Coming attraction:Chapter 7: Taxes
