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1、Elasticity and Its ApplicationChapter 5Copyright 2001 by Harcourt, Inc.Allrightsreserved.Requestsforpermissiontomakecopiesofanypartoftheworkshouldbemailedto:PermissionsDepartment,HarcourtCollegePublishers,6277SeaHarborDrive,Orlando,Florida32887-6777.Harcourt,Inc.itemsandderiveditemscopyright2001byHa
2、rcourt,Inc.Elasticity . . .u is a measure of how much buyers and sellers respond to changes in market conditions u allows us to analyze supply and demand with greater precision.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Price Elasticity of DemanduPrice elasticity of demand is the p
3、ercentage change in quantity demanded given a percent change in the price. uIt is a measure of how much the quantity demanded of a good responds to a change in the price of that good.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Determinants of Price Elasticity of DemanduNecessities v
4、ersus LuxuriesuAvailability of Close SubstitutesuDefinition of the MarketuTime HorizonHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Determinants of Price Elasticity of DemandDemand tends to be more elastic :uif the good is a luxury.uthe longer the time period.uthe larger the number of
5、 close substitutes.uthe more narrowly defined the market.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Computing the Price Elasticity of DemandThe price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.Harcour
6、t,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Computing the Price Elasticity of DemandExample: If the price of an ice cream cone increases from $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:Harcourt,Inc.itemsandderivedite
7、mscopyright2001byHarcourt,Inc.Computing the Price Elasticity of Demand Using the Midpoint FormulaThe midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.Harcourt,Inc.itemsandderiveditemscopyright200
8、1byHarcourt,Inc.Computing the Price Elasticity of DemandExample: If the price of an ice cream cone increases from $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:Harcourt,Inc.itemsandderiveditemscopyrigh
9、t2001byHarcourt,Inc.Ranges of ElasticityInelastic DemanduQuantity demanded does not respond strongly to price changes.uPrice elasticity of demand is less than one.Elastic DemanduQuantity demanded responds strongly to changes in price.uPrice elasticity of demand is greater than one.Harcourt,Inc.items
10、andderiveditemscopyright2001byHarcourt,Inc.Computing the Price Elasticity of DemandDemand is price elastic$54DemandQuantity1000Price50Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Ranges of ElasticityuPerfectly InelasticQuantity demanded does not respond to price changes.uPerfectly El
11、asticQuantity demanded changes infinitely with any change in price.uUnit ElasticQuantity demanded changes by the same percentage as the price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.A Variety of Demand CurvesBecause the price elasticity of demand measures how much quantity deman
12、ded responds to the price, it is closely related to the slope of the demand curve.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Perfectly Inelastic Demand- Elasticity equals 0QuantityPrice4$5Demand1002. .leaves the quantity demanded unchanged.1. Anincreasein price.Harcourt,Inc.itemsan
13、dderiveditemscopyright2001byHarcourt,Inc.Inelastic Demand- Elasticity is less than 1QuantityPrice4$51. A 22%increasein price.Demand100902. .leads to a 11% decrease in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Unit Elastic Demand- Elasticity equals 1QuantityPrice4$51. A 22
14、%increasein price.Demand100802. .leads to a 22% decrease in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elastic Demand- Elasticity is greater than 1QuantityPrice4$51. A 22%increasein price.Demand100502. .leads to a 67% decrease in quantity.Harcourt,Inc.itemsandderiveditemsc
15、opyright2001byHarcourt,Inc.Perfectly Elastic Demand- Elasticity equals infinityQuantityPriceDemand$41. At any priceabove $4, quantitydemanded is zero.2. At exactly $4,consumers willbuy any quantity.3. At a price below $4,quantity demanded is infinite.Harcourt,Inc.itemsandderiveditemscopyright2001byH
16、arcourt,Inc.Elasticity and Total RevenueuTotal revenue is the amount paid by buyers and received by sellers of a good.uComputed as the price of the good times the quantity sold.TR = P x QHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.$4DemandQuantityP0PriceP x Q = $400 (total revenue)1
17、00QElasticity and Total RevenueHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elasticity and Total RevenueWith an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases. Harcourt,Inc.itemsandderivedite
18、mscopyright2001byHarcourt,Inc.Elasticity and Total Revenue: Inelastic Demand$3Quantity0Price80Revenue = $240 Demand$1DemandQuantity0Revenue = $100100 PriceAn increase in price from $1 to $3.leads to an increase in total revenue from$100 to $240Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt
19、,Inc.Elasticity and Total RevenueWith an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elasticity and Total Revenue: Elastic DemandDema
20、ndQuantity0Price$450DemandQuantity0PriceRevenue = $100 $520Revenue = $200 An increase in price from $4 to $5.leads to a decrease in total revenue from$200 to $100Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Computing the Elasticity of a Linear Demand CurveHarcourt,Inc.itemsandderived
21、itemscopyright2001byHarcourt,Inc.Income Elasticity of DemanduIncome elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers income. uIt is computed as the percentage change in the quantity demanded divided by the percentage change in income.Harcourt,I
22、nc.itemsandderiveditemscopyright2001byHarcourt,Inc. Computing Income ElasticityIncome Elasticityof DemandPercentage Change in Quantity DemandedPercentage Change in Income=Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Income Elasticity- Types of Goods -uNormal GoodsuInferior GoodsuHigh
23、er income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Income Elasticity- Types of Goods -uGoods consumers regard as necessities tend to be income inelasticExamples include food, fuel,
24、clothing, utilities, and medical services.uGoods consumers regard as luxuries tend to be income elastic.Examples include sports cars, furs, and expensive foods.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Price Elasticity of SupplyuPrice elasticity of supply is the percentage change
25、in quantity supplied resulting from a percent change in price.uIt is a measure of how much the quantity supplied of a good responds to a change in the price of that good.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Ranges of ElasticityuPerfectly ElasticES = uRelatively ElasticES 1uUn
26、it ElasticES = 1Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Ranges of ElasticityuRelatively InelasticES 1uPerfectly InelasticES = 0 Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Perfectly Inelastic Supply- Elasticity equals 0QuantityPrice4$5Supply1002. .leaves the qua
27、ntity supplied unchanged.1. Anincreasein price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Inelastic Supply- Elasticity is less than 1QuantityPrice4$51. A 22%increasein price.110100Supply2. .leads to a 10% increase in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt
28、,Inc.Unit Elastic Supply- Elasticity equals 1QuantityPrice4$51. A 22%increasein price.125100Supply2. .leads to a 22% increase in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elastic Supply- Elasticity is greater than 1QuantityPrice4$51. A 22%increasein price.200100Supply2. .
29、leads to a 67% increase in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Perfectly Elastic Supply- Elasticity equals infinityQuantityPriceSupply$41. At any priceabove $4, quantitysupplied is infinite.2. At exactly $4,producers willsupply any quantity.3. At a price below $4,qu
30、antity supplied is zero.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Determinants of Elasticity of SupplyuAbility of sellers to change the amount of the good they produce.uBeach-front land is inelastic.uBooks, cars, or manufactured goods are elastic.uTime period. uSupply is more elas
31、tic in the long run.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Computing the Price Elasticity of SupplyThe price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.Harcourt,Inc.itemsandderiveditemscopyright20
32、01byHarcourt,Inc.Application of ElasticityuCan good news for farming be bad news for farmers?uWhat happens to wheat farmers and the market for wheat when university agronomists discover a new wheat hybrid that is more productive than existing varieties?Harcourt,Inc.itemsandderiveditemscopyright2001b
33、yHarcourt,Inc.Application of ElasticityuExamine whether the supply or demand curve shifts.uDetermine the direction of the shift of the curve.uUse the supply-and-demand diagram to see how the market equilibrium changes.An Increase in Supply in the Market for Wheat$3Quantity of Wheat1000Price ofWheatD
34、emandS1Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.3. .and a proportionately smallerincrease in quantity sold. As a result,revenue falls from $300 to $220.An Increase in Supply in the Market for Wheat$3Quantity of Wheat1000Price ofWheat1. When demand is inelastic,an increase in supp
35、ly.DemandS1S221102. .leadsto a large fall in price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Compute ElasticityHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Compute ElasticityDemand is inelasticHarcourt,In
36、c.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuPrice elasticity of demand measures how much the quantity demanded responds to changes in the price. uIf a demand curve is elastic, total revenue falls when the price rises. uIf it is inelastic, total revenue rises as the price rises. Harcour
37、t,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.SummaryuThe price elasticity of supply measures how much the quantity supplied responds to changes in the price. uIn most markets, supply is more elastic in the long run than in the short run. Harcourt,Inc.itemsandderiveditemscopyright2001byHarco
38、urt,Inc.Graphical ReviewHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Computing the Price Elasticity of DemandDemand is price elastic$54DemandQuantity1000Price50Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Perfectly Inelastic Demand- Elasticity equals 0QuantityPrice4$5
39、Demand1002. .leaves the quantity demanded unchanged.1. Anincreasein price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Inelastic Demand- Elasticity is less than 1QuantityPrice4$51. A 22%increasein price.Demand100902. .leads to a 11% decrease in quantity.Harcourt,Inc.itemsandderivedit
40、emscopyright2001byHarcourt,Inc.Unit Elastic Demand- Elasticity equals 1QuantityPrice4$51. A 22%increasein price.Demand100802. .leads to a 22% decrease in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elastic Demand- Elasticity is greater than 1QuantityPrice4$51. A 22%increase
41、in price.Demand100502. .leads to a 67% decrease in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Perfectly Elastic Demand- Elasticity equals infinityQuantityPriceDemand$41. At any priceabove $4, quantitydemanded is zero.2. At exactly $4,consumers willbuy any quantity.3. At a
42、price below $4,quantity demanded is infinite.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.$4DemandQuantityP0PriceP P x x Q Q = = $400$400 (total revenue)(total revenue)100QElasticity and Total RevenueHarcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elasticity and Total Re
43、venue: Inelastic Demand$3Quantity0Price80Revenue = $240 Demand$1DemandQuantity0Revenue = $100100 PriceAn increase in price from $1 to $3.leads to an increase in total revenue from$100 to $240Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elasticity and Total Revenue: Elastic DemandDema
44、ndQuantity0Price$450DemandQuantity0PriceRevenue = $100 $520Revenue = $200 An increase in price from $4 to $5.leads to a decrease in total revenue from$200 to $100Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Perfectly Inelastic Supply- Elasticity equals 0QuantityPrice4$5Supply1002. .l
45、eaves the quantity supplied unchanged.1. Anincreasein price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Inelastic Supply- Elasticity is less than 1QuantityPrice4$51. A 22%increasein price.110100Supply2. .leads to a 10% increase in quantity.Harcourt,Inc.itemsandderiveditemscopyright2
46、001byHarcourt,Inc.Unit Elastic Supply- Elasticity equals 1QuantityPrice4$51. A 22%increasein price.125100Supply2. .leads to a 22% increase in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Elastic Supply- Elasticity is greater than 1QuantityPrice4$51. A 22%increasein price.200
47、100Supply2. .leads to a 67% increase in quantity.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.Perfectly Elastic Supply- Elasticity equals infinityQuantityPriceSupply$41. At any priceabove $4, quantitysupplied is infinite.2. At exactly $4,producers willsupply any quantity.3. At a pric
48、e below $4,quantity supplied is zero.An Increase in Supply in the Market for Wheat$3Quantity of Wheat1000Price ofWheatDemandS1Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.An Increase in Supply in the Market for Wheat3. .and a proportionately smallerincrease in quantity sold. As a result,revenue falls from $300 to $220.$3Quantity of Wheat1000Price ofWheat1. When demand is inelastic,an increase in supply.DemandS1S221102. .leadsto a large fall in price.Harcourt,Inc.itemsandderiveditemscopyright2001byHarcourt,Inc.
