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©
© 2002
2002 by
by Nelson,
Nelson, aa division
division of
of Thomson
Thomson Canada
Canada Limited
Limited
In
In this
this chapter
chapter you
you will…
will…
•• Learn
Learn the
the meaning
meaning of
of the
the elasticity
elasticity ofof
demand.
demand.
•• Examine
Examine what
what determines
determines thethe elasticity
elasticity of
of
demand.
demand.
•• Learn
Learn the
the meaning
meaning of
of the
the elasticity
elasticity ofof
supply.
supply.
•• Examine
Examine what
what determines
determines thethe elasticity
elasticity of
of
supply.
supply.
•• Apply
Apply the
the concept
concept of
of elasticity
elasticity in
in three
three
different
different markets.
markets.
•• …
… is
is aa measure
measure of
of how
how much
much buyers
buyers and
and
sellers
sellers respond
respond to
to changes
changes in
in market
market
conditions
conditions
•• Price
Price elasticity
elasticity of
of demand
demand is is the
the
percentage
percentage change
change inin quantity
quantity demanded
demanded
given
given aa percent
percent change
change inin the
the price.
price.
•• The
The price
price elasticity
elasticity of
of demand
demand is is
computed
computed asas the
the percentage
percentage change
change in
in the
the
quantity
quantity demanded
demanded divided
divided byby the
the
percentage
percentage change
change in in price.
price.
•• From Point A to Point B: Price rise = 50% and Quantity fall = 33%
From Point A to Point B: Price rise = 50% and Quantity fall = 33%
•• From Point B to Point A: Price fall = 33% and Quantity rise = 50%
From Point B to Point A: Price fall = 33% and Quantity rise = 50%
•• Inelastic
Inelastic Demand
Demand
–– Quantity
Quantity demanded
demanded does does not
not respond
respond
strongly
strongly to
to price
price changes.
changes.
–– Price
Price elasticity
elasticity of
of demand
demand is
is less
less than
than
one.
one.
•• Elastic
Elastic Demand
Demand
–– Quantity
Quantity demanded
demanded responds
responds strongly
strongly
to
to changes
changes in in price.
price.
–– Price
Price elasticity
elasticity of
of demand
demand is
is greater
greater
than
than one.
one.
•• Perfectly
Perfectly Inelastic
Inelastic
–– Quantity
Quantity demanded
demanded does
does not
not respond
respond toto
price
price changes.
changes.
•• Perfectly
Perfectly Elastic
Elastic
–– Quantity
Quantity demanded
demanded changes
changes infinitely
infinitely
with
with any
any change
change in
in price.
price.
•• Unit
Unit Elastic
Elastic
–– Quantity
Quantity demanded
demanded changes
changes by by the
the
same
same percentage
percentage as
as the
the price.
price.
•• Because
Because thethe price
price elasticity
elasticity of of demand
demand
measures
measures how how much
much quantity
quantity demanded
demanded
responds
responds to to the
the price,
price, itit is
is closely
closely related
related
to
to the
the slope
slope of
of the
the demand
demand curve. curve.
Price
Demand E=0
$5.00
$4.00
1. An increase
in price…
0 100 Quantity
Price
Demand E<1
$5.00
$4.00
1. A 22%
increase in
price…
0 90 100 Quantity
Price E=1
Demand
$5.00
$4.00
1. A 22%
increase in
price…
0 80 100 Quantity
Price E>1
Demand
$5.00
$4.00
1. A 22%
increase in
price…
0 50 100 Quantity
Price E=
$4.00 Demand
2. At exactly $4, consumers will buy any quantity.
0
Quantity
TR
TR == PP xx Q
Q
$4.00
P x Q = $400
(revenue)
Demand
0 100 Quantity
$3.00
P x Q = $400
(revenue)
$1.00
P x Q = $100
(revenue) Demand
0 80 100 Quantity
$5.00
$4.00
Demand
Revenue = $200
Revenue = $100
0 20 50 Quantity
7 Elasticity
is larger
than 1.
6
4
Elasticity
is smaller
3 than 1.
0 2 4 14 Quantity
6 8 10 12
P e rc e n ta g e c h a n g e
in q u a n tity d e m a n d e d
In c o m e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e
in in c o m e
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 5: Page 25
Other
Other Demand
Demand Elasticities
Elasticities
•• Types
Types ofof Goods
Goods
–– Normal
Normal Goods
Goods
–– Inferior
Inferior Goods
Goods
•• Higher
Higher income
income raises
raises the
the quantity
quantity
demanded
demanded for for normal
normal goods
goods butbut lowers
lowers
the
the quantity
quantity demanded
demanded for for inferior
inferior goods.
goods.
•• Goods
Goods consumers
consumers regard
regard asas necessities
necessities
tend
tend toto be
be income
income inelastic
inelastic
–– Examples
Examples include
include food,
food, fuel,
fuel, clothing,
clothing,
utilities,
utilities, and
and medical
medical services.
services.
•• Goods
Goods consumers
consumers regard
regard asas luxuries
luxuries tend
tend
to
to be
be income
income elastic.
elastic.
–– Examples
Examples include
include sports
sports cars,
cars, furs,
furs, and
and
expensive
expensive foods.
foods.
•• Price
Price elasticity
elasticity of
of supply
supply is is the
the percentage
percentage
change
change inin quantity
quantity supplied
supplied given
given aa
percent
percent change
change inin the
the price.
price.
•• The
The price
price elasticity
elasticity of
of supply
supply is is computed
computed
as
as the
the percentage
percentage change
change inin the
the quantity
quantity
supplied
supplied divided
divided by
by the
the percentage
percentage
change
change in in price.
price.
P e rc e n ta g e c h a n g e
in q u a n tity s u p p lie d
P ric e e la s tic ity o f s u p p ly =
P e rc e n ta g e c h a n g e in p ric e
•• ……using
usingthe
themidpoint
midpointmethod,
method,we wecalculate
calculatethe
thepercent
percentchange
changeinin
the price as (2.10 - 1.90) / 2.00 x 100 = 10%
the price as (2.10 - 1.90) / 2.00 x 100 = 10%
•• Similarly,
Similarly,we
wecalculate
calculatethe
thepercent
percentchange
changein inthe
thequantity
quantitysupplied
supplied
as
as(11
(11000
000--9000)
9000)/ /10
10000
000xx100
100==20%
20%
20%
Price elasticity of supply = = 2.0
10%
Price
Supply E=0
$5.00
$4.00
1. An increase
in price…
0 100 Quantity
Price E<0
Supply
$5.00
$4.00
1. A 22%
increase in
price…
Price E=1
Supply
$5.00
$4.00
1. A 22%
increase in
price…
Price E>1
Supply
$5.00
$4.00
1. A 22%
increase in
price…
Price E=
$4.00 Supply
2. At exactly $4, producers will supply any quantity.
0
Quantity
$15
Elasticity is less
than 1
$12
Elasticity is
greater than 1
$4
$3
•• Good
Good news
news bad
bad news
news for
for farmers
farmers
•• OPEC
OPEC
•• Drugs
Drugs and
and crime
crime
$3
$2
2. … leads
to a fall in
price…
Demand
S1
P2 P2
P1
P1
2. … leads
Demand
2. … leads to a small
to a large increase in
increase in price…
price…
Demand
S1
Supply
P2
P1
P2
P1
D1
2. … which
2. … which reduces the
raises the price…
price…
D2
Demand