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You are on page 1of 32

ELASTICITY AND I T S A P P L I C A T I O N

INSTRUCTOR

NGUYEN TAI VUONG

GROUP 6 :

1. Nguyen Nhat

Linh

2. Hoang Thi Le

3. Nguyen Ngoc

Mai

4. Pham Thuy

Linh

MAIN PARTS

Three

The Applications

The

Elasticity of Supply,

Elasticity

of Demand,

of Supply and

Demand

Elasticity

THE ELASTICITY OF DEMAND

Price elasticity of demand : A measure of how much

the quantity demanded of a good responds to a change in the

price of that good.

Factors affecting Elasticity

if the good the larger the

is a luxury. number of close

substitutes.

DETERMINANTS

the more narrowly defined the longer the time

the market. period.

COMPUTING THE PRICE ELASTICITY OF DEMAND

THE MIDPOINT METHOD: A BETTER WAY TO

CALCULATE PERCENTAGE CHANGES AND ELASTICITIES

is preferable when

calculating the price

elasticity of demand

because it gives the same

answer regardless of the

direction of the change.

THE VARIETY OF DEMAND CURVES

is greater than 1, so that quantity

moves proportionately more than the

price. Rule of thumb :

Demand is inelastic when the The flatter the curve,

elasticity is less than 1, so that

the bigger the

quantity moves proportionately

less than the price. elasticity.

If the elasticity is exactly 1, so

that quantity moves the same curve, the smaller

amount proportionately as price, the elasticity.

demand is said to have unit

elasticity.

TOTAL REVENUE AND THE PRICE ELASTICITY OF DEMAND

sellers of a good.

TR = P x Q

Inelastic

Demand

Elastic

Demand

General Rule

When a demand

When a demand In the special case

curve is elastic (a

curve is inelastic (a of unit elastic

price elasticity

price elasticity less demand (a price

greater than 1), a

than 1), a price elasticity exactly

price increase

increase raises equal to 1), a

reduces total

total revenue, and change in the

revenue, and a

a price decrease price does not

price decrease

reduces total affect total

raises total

revenue. revenue.

revenue.

ELASTICITY AND TOTAL REVENUE ALONG

A LINEAR DEMAND CURVE

OTHER DEMAND ELASTICITIES

The Income demanded of a good responds to a change

Elasticity of in consumers income .

Demand

The Cross-

A measure of how much the quantity

Price

demanded of one good responds to a

Elasticity of

change in the price of another good.

Demand

THE ELASTICITY OF SUPPLY

quantity supplied of a good responds to a change in the price

of that good.

Factors affecting

Elasticity

Seller

DETERMINANTS

Time

TIME

New buiding

COMPUTING THE PRICE

ELASTICITY OF SUPPLY

measured :

THE VARIETY OF SUPPLY CURVES

zero elasticity, supply is

perfectly inelastic, and

the supply curve is

vertical.

supply is perfectly elastic.

This occurs as the price

elasticity of supply

approaches infinity and the

supply curve becomes

horizontal.

THREE APPLICATIONS OF SUPPLY, DEMAND, AND

ELASTICITY

DOES DRUG

CAN GOOD

WHY DID INTERDICTION

NEWS FOR

OPEC FAIL TO INCREASE OR

FARMING BE

KEEP THE DECREASE

BAD NEWS

PRICE OF OIL DRUG-

FOR

HIGH? RELATED

FARMERS?

CRIME?

CAN GOOD NEWS FOR FARMING BE BAD NEWS FOR FARMERS ?

the supply curve or demand

curve shifts

direction the curve shifts.

and-demand diagram to

see how the market

equilibrium changes.

bushel of

produce more

wheat sells for

wheat

less

(Q rises)

(P falls)

Each Farmer All Farmers

wheat farmers are worse off

FARMERS CONSUMERS

TECHNOLOGY

POLICY

WHY DID OPEC FAIL TO KEEP THE PRICE OF OIL HIGH?

In the short run In the long run

DOES DRUG INTERDICTION INCREASE

OR DECREASE DRUG-RELATED CRIME?

summa

ry

Price elasticity of

demand measures how The income elasticity

In most markets,

much the quantity of demand measures

supply is more elastic

demanded responds to how much the quantity

in the long run than in

changes in the price. demanded responds to

the short run.

Price elasticity of changes in consumers'

The price elasticity of

demand is calculated as income.

supply is calculated as

the percentage change in The cross-price

the percentage change

quantity demanded elasticity of demand

in quantity supplied

divided by the measures how much the

divided by the

percentage change in quantity demanded of

percentage change in

price. in good responds to the

price.

If a demand curve is price of another good.

The tools of supply

elastic, total revenue The price elasticity of

and demand can be

falls when the price supply measures how

applied in many

rises. much the quantity

different types of

If it is inelastic, total supplied responds to

markets.

revenue rises as the changes in the price

price rises.

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