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1、CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster1 of 31PowerPoint Lectures for Principles of Economics, 9eBy Karl E. Case, Ray C. Fair & Sharon M. Oster ; ; CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as
2、 Prentice Hall Principles of Economics 9e by Case, Fair and Oster2 of 31 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster5PART I INTRODUCTION TO ECONOMICSElasticityFernando & Yvonn QuijanoPrepared by:CHAPTER 5 Elasticity 2009 Pearson Educati
3、on, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster4 of 315PART I INTRODUCTION TO ECONOMICSElasticityPrice Elasticity of DemandSlope and ElasticityTypes of ElasticityCalculating ElasticitiesCalculating Percentage ChangesElasticity Is a Ratio of PercentagesThe Midp
4、oint FormulaElasticity Changes Along a Straight-Line Demand CurveElasticity and Total RevenueThe Determinants of Demand ElasticityAvailability of SubstitutesThe Importance of Being UnimportantThe Time DimensionOther Important ElasticitiesIncome Elasticity of DemandCross-Price Elasticity of DemandEla
5、sticity of SupplyLooking AheadAppendix: Point ElasticityCHAPTER OUTLINECHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster5 of 31Elasticityelasticity A general concept used to quantify the response in one variable when anot
6、her variable changes.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster6 of 31Price Elasticity of DemandSlope and Elasticity FIGURE 5.1 Slope Is Not a Useful Measure of ResponsivenessChanging the unit of measure from pound
7、s to ounces changes the numerical value of the demand slope dramatically, but the behavior of buyers in the two diagrams is identical.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster7 of 31Price Elasticity of Demandprice
8、 elasticity of demand The ratio of the percentage of change in quantity demanded to the percentage of change in price; measures the responsiveness of quantity demanded to changes in price.Slope and ElasticityCHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of
9、Economics 9e by Case, Fair and Oster8 of 31Price Elasticity of DemandTypes of ElasticityTABLE 5.1 Hypothetical Demand Elasticities for Four ProductsProduct% Change In Price(% D DP)% ChangeIn Quantity Demanded(% D DQD)Elasticity(% D DQD %D DP)Insulin+10%0% .0Perfectly inelasticBasic telephone service
10、+10%-1% -.1InelasticBeef+10%-10%-1.0Unitarily elasticBananas+10%-30%-3.0Elasticperfectly inelastic demand Demand in which quantity demanded does not respond at all to a change in price.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, F
11、air and Oster9 of 31Price Elasticity of DemandTypes of Elasticity FIGURE 5.2 Perfectly Inelastic and Perfectly Elastic Demand CurvesFigure 5.2(a) shows a perfectly inelastic demand curve for insulin. Price elasticity of demand is zero. Quantity demanded is fixed; it does not change at all when price
12、 changes.Figure 5.2(b) shows a perfectly elastic demand curve facing a wheat farmer. A tiny price increase drives the quantity demanded to zero. In essence, perfectly elastic demand implies that individual producers can sell all they want at the going market price but cannot charge a higher price. C
13、HAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster10 of 31Price Elasticity of Demandinelastic demand Demand that responds somewhat, but not a great deal, to changes in price. Inelastic demand always has a numerical value be
14、tween zero and -1.Types of ElasticityA warning: You must be very careful about signs. Because it is generally understood that demand elasticities are negative (demand curves have a negative slope), they are often reported and discussed without the negative sign. CHAPTER 5 Elasticity 2009 Pearson Edu
15、cation, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster11 of 31Price Elasticity of DemandTypes of Elasticityunitary elasticity A demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in a
16、bsolute value (a demand elasticity of -1).elastic demand A demand relationship in which the percentage change in quantity demanded is larger than the percentage change in price in absolute value (a demand elasticity with an absolute value greater than 1). perfectly elastic demand Demand in which qua
17、ntity drops to zero at the slightest increase in price.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster12 of 31Price Elasticity of DemandTypes of ElasticityA good way to remember the difference between the two “perfect”
18、elasticities is:CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster13 of 31Calculating ElasticitiesTo calculate percentage change in quantity demanded using the initial value as the base, the following formula is used:Calcu
19、lating Percentage ChangesCHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster14 of 31Calculating ElasticitiesCalculating Percentage ChangesWe can calculate the percentage change in price in a similar way. Once again, let us
20、use the initial value of Pthat is, P1as the base for calculating the percentage. By using P1 as the base, the formula for calculating the percentage of change in P isCHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster15 of
21、31Calculating ElasticitiesElasticity Is a Ratio of PercentagesOnce all the changes in quantity demanded and price have been converted to percentages, calculating elasticity is a matter of simple division. Recall the formal definition of elasticity:CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Pu
22、blishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster16 of 31Calculating ElasticitiesThe Midpoint Formulamidpoint formula A more precise way of calculating percentages using the value halfway between P1 and P2 for the base in calculating the percentage change in price, and the
23、 value halfway between Q1 and Q2 as the base for calculating the percentage change in quantity demanded.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster17 of 31Calculating ElasticitiesThe Midpoint FormulaUsing the point
24、halfway between P1 and P2 as the base for calculating the percentage change in price, we getCHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster18 of 31Calculating ElasticitiesThe Midpoint FormulaCHAPTER 5 Elasticity 2009 Pe
25、arson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster19 of 31Calculating ElasticitiesElasticity Changes Along a Straight-Line Demand CurveTABLE 5.3 Demand Schedule for Office Dining Room LunchesPrice(perLunch)Quantity Demanded(Lunches per Month)$1110987
26、65432100246810121416182022 FIGURE 5.3 Demand Curve for Lunch at the Office Dining RoomBetween points A and B, demand is quite elastic at -6.4.Between points C and D, demand is quite inelastic at -.294.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economi
27、cs 9e by Case, Fair and Oster20 of 31Calculating ElasticitiesElasticity and Total RevenueTR = P x Qtotal revenue = price x quantityIn any market, P x Q is total revenue (TR) received by producers:When price (P) declines, quantity demanded (QD) increases. The two factors, P and QD move in opposite di
28、rections:Effects of price changeson quantity demanded:CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster21 of 31Calculating ElasticitiesElasticity and Total RevenueBecause total revenue is the product of P and Q, whether T
29、R rises or falls in response to a price increase depends on which is bigger: the percentage increase in price or the percentage decrease in quantity demanded.If the percentage decline in quantity demanded following a price increase is larger than the percentage increase in price, total revenue will
30、fall.Effects of price increase ona product with inelastic demand:Effects of price increase ona product with inelastic demand:CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster22 of 31Calculating ElasticitiesElasticity and
31、Total RevenueThe opposite is true for a price cut. When demand is elastic, a cut in price increases total revenues:When demand is inelastic, a cut in price reduces total revenues:effect of price cut on a productwith elastic demand:effect of price cut on a productwith inelastic demand:CHAPTER 5 Elast
32、icity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster23 of 31The Determinants of Demand ElasticityAvailability of SubstitutesPerhaps the most obvious factor affecting demand elasticity is the availability of substitutes.The Importance of Be
33、ing UnimportantWhen an item represents a relatively small part of our total budget, we tend to pay little attention to its price.The Time DimensionThe elasticity of demand in the short run may be very different from the elasticity of demand in the long run. In the longer run, demand is likely to bec
34、ome more elastic, or responsive, simply because households make adjustments over time and producers develop substitute goods. CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster24 of 31The Determinants of Demand ElasticityW
35、ho Are the Elastic Smokers?Bill aims to raise tax on cigarettesSeattle TimesCHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster25 of 31The Determinants of Demand ElasticityElasticities at a Delicatessen in the Short Run and
36、 Long RunThe graph shows the expected relationship between long-run and short-run demand for Franks sandwiches. Notice if you raise prices above the current level, the expected quantity change read off the short-run curve is less than that from the long-run curve. CHAPTER 5 Elasticity 2009 Pearson E
37、ducation, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster26 of 31Other Important ElasticitiesIncome Elasticity of Demandincome elasticity of demand A measure of the responsiveness of demand to changes in income.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Pub
38、lishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster27 of 31Other Important ElasticitiesCross-Price Elasticity Of Demandcross-price elasticity of demand A measure of the response of the quantity of one good demanded to a change in the price of another good.CHAPTER 5 Elasticity
39、 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster28 of 31Other Important ElasticitiesElasticity Of Supplyelasticity of supply A measure of the response of quantity of a good supplied to a change in price of that good. Likely to be positive i
40、n output markets.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster29 of 31Other Important ElasticitiesElasticity Of Supplyelasticity of labor supply A measure of theresponse of labor supplied to a change in the price of l
41、abor.CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster30 of 31cross-price elasticity of demandelastic demandelasticityelasticity of labor supplyelasticity of supplyincome elasticity of demandinelastic demandmidpoint formu
42、laperfectly elastic demandperfectly inelastic demandprice elasticity of demandunitary elasticityREVIEW TERMS AND CONCEPTSCHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster31 of 31POINT ELASTICITY (OPTIONAL)A P P E N D I XC
43、onsider the straight-line demand curve in Figure 5A.1. We can write an expression for elasticity at point C as follows: FIGURE 5A.1 Elasticity at a Point Along a Demand CurveCHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Ost
44、er32 of 31POINT ELASTICITY (OPTIONAL)A P P E N D I XQ/P is the reciprocal of the slope of the curve. Slope in the diagram is constant along the curve, and it is negative. To calculate the reciprocal of the slope to plug into the previous electricity equation, we take Q1B, or M1, and divide by minus
45、the length of line segment CQ1. Thus,Since the length of CQ1 is equal to P1, we can write:By substituting we get:CHAPTER 5 Elasticity 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster33 of 31POINT ELASTICITY (OPTIONAL)A P P E N D I X FIGURE 5A.2 Point Elasticity Changes Along a Demand Curve
