Chapter 3 elasticity for economics
Download as PPT, PDF16 likes11,872 views
1. A new, more productive variety of paddy increases supply, shifting the supply curve to the right. 2. With inelastic demand, this leads to a large fall in price and a proportionately smaller increase in quantity sold. 3. As a result, total revenue for farmers falls despite the increased supply.
More Related Content
Similar to Chapter 3 elasticity for economics (20)
More from Deden As-Syafei (20)
Chapter 3 elasticity for economics
- 2. Elasticity . . . • … allows us to analyze supply and demand with greater precision. • … is a measure of how much buyers and sellers respond to changes in market conditions • Rate of change of the quantity demanded or quantity supplied due to change in a variable.
- 3. THE ELASTICITY OF DEMAND • The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. • When we talk about elasticity, that responsiveness is always measured in percentage terms. • Specifically, the price elasticity of demand is the percentage change in quantity demanded due to a percentage change in the price.
- 5. The Price Elasticity of Demand and Its Determinants • Availability of Close Substitutes • Necessities versus Luxuries • Definition of the Market • Time Horizon © 2011 Cengage South-Western
- 6. The Price Elasticity of Demand and Its Determinants • Demand tends to be more elastic: • the larger the number of close substitutes. • if the good is a luxury. • the more narrowly defined the market. • the longer the time period.
- 7. Computing the Price Elasticity of Demand • The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. P r i c e e l a s t i c i t y o f d e m a n d = P e r c e n t a g e c h a n g e i n q u a n t i t y d e m a n d e d P e r c e n t a g e c h a n g e i n p r i c e
- 8. Computing the Price Elasticity of Demand • Example: If the price of an ice cream cone increases from RM2.00 to RM2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as: ( ) ( . . ) . 1 0 8 1 0 1 0 0 2 2 0 2 0 0 2 0 0 1 0 0 2 0 % 1 0 % 2 − × − × = = P r i c e e l a s t i c i t y o f d e m a n d = P e r c e n t a g e c h a n g e i n q u a n t i t y d e m a n d e d P e r c e n t a g e c h a n g e i n p r i c e
- 9. The Variety of Demand Curves • Inelastic Demand, Ep < 1 • Quantity demanded does not respond strongly to price changes. • Price elasticity of demand is less than one. • Elastic Demand, Ep >1 • Quantity demanded responds strongly to changes in price. • Price elasticity of demand is greater than one.
- 10. Computing the Price Elasticity of Demand Demand is price elastic. RM5 4 Demand Quantity1000 50 3 percent22 percent67 5.00)/2(4.00 5.00)(4.00 50)/2(100 50)(100 ED −= − = + − + − = Price
- 11. The Variety of Demand Curves • Perfectly Inelastic, Ed = 0 • Quantity demanded does not respond to price changes. • Perfectly Elastic, 1 < Ed <1 • Quantity demanded changes infinitely with any change in price. • Unit Elastic, Ed=1 • Quantity demanded changes by the same percentage as the price.
- 12. Figure 1 The Price Elasticity of Demand (a) Perfectly Inelastic Demand: Elasticity Equals 0 5 4 Quantity Demand 1000 1. An increase in price . . . 2. . . . leaves the quantity demanded unchanged. Price
- 13. Figure 1 The Price Elasticity of Demand (b) Inelastic Demand: Elasticity Is Less Than 1 Quantity0 5 90 Demand1. A 22% increase in price . . . Price 2. . . . leads to an 11% decrease in quantity demanded. 4 100
- 14. Figure 1 The Price Elasticity of Demand 2. . . . leads to a 22% decrease in quantity demanded. (c) Unit Elastic Demand: Elasticity Equals 1 Quantity 4 1000 Price 5 80 1. A 22% increase in price . . . Demand
- 15. Figure 1 The Price Elasticity of Demand (d) Elastic Demand: Elasticity Is Greater Than 1 Demand Quantity 4 1000 Price 5 50 1. A 22% increase in price . . . 2. . . . leads to a 67% decrease in quantity demanded.
- 16. Figure 1 The Price Elasticity of Demand (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity0 Price 4 Demand 2. At exactly RM4, consumers will buy any quantity. 1. At any price above RM4, quantity demanded is zero. 3. At a price below RM4, quantity demanded is infinite.
- 17. Other Demand Elasticities • Income Elasticity of Demand • Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. • It is computed as the percentage change in the quantity demanded divided by the percentage change in income.
- 18. Other Demand Elasticities • Computing Income Elasticity I n c o m e e l a s t i c i t y o f d e m a n d = P e r c e n t a g e c h a n g e i n q u a n t i t y d e m a n d e d P e r c e n t a g e c h a n g e i n i n c o m e Remember, all elasticities are measured by dividing one percentage change by another
- 19. Other Demand Elasticities • Income Elasticity • Types of Goods • Normal Goods • Inferior Goods • Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.
- 20. Other Demand Elasticities • Income Elasticity • Goods consumers regard as necessities tend to be income inelastic • Examples include food, fuel, clothing, utilities, and medical services. • Goods consumers regard as luxuries tend to be income elastic. • Examples include sports cars, furs, and expensive foods.
- 21. Other Demand Elasticities • Cross-price elasticity of demand • A measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good 2goodofpricein%change 1goodofdemandedquantityin%change demandofelasticityprice-Cross =
- 22. THE ELASTICITY OF SUPPLY • Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good. • Price elasticity of supply is the percentage change in quantity supplied resulting from a percentage change in price.
- 23. Figure 5 The Price Elasticity of Supply (a) Perfectly Inelastic Supply: Elasticity Equals 0 5 4 Supply Quantity1000 1. An increase in price . . . 2. . . . leaves the quantity supplied unchanged. Price
- 24. Figure 5 The Price Elasticity of Supply (b) Inelastic Supply: Elasticity Is Less Than 1 110 5 100 4 Quantity0 1. A 22% increase in price . . . Price 2. . . . leads to a 10% increase in quantity supplied. Supply
- 25. Figure 5 The Price Elasticity of Supply (c) Unit Elastic Supply: Elasticity Equals 1 125 5 100 4 Quantity0 Price 2. . . . leads to a 22% increase in quantity supplied. 1. A 22% increase in price . . . Supply (If SUPPLY is unit elastic and linear, it will begin at the origin.)
- 26. Figure 5 The Price Elasticity of Supply (d) Elastic Supply: Elasticity Is Greater Than 1 Quantity0 Price 1. A 22% increase in price . . . 2. . . . leads to a 67% increase in quantity supplied. 4 100 5 200 Supply
- 27. Figure 5 The Price Elasticity of Supply (e) Perfectly Elastic Supply: Elasticity Equals Infinity Quantity0 Price 4 Supply 3. At a price below RM4, quantity supplied is zero. 2. At exactly RM4, producers will supply any quantity. 1. At any price above RM4, quantity supplied is infinite.
- 28. The Price Elasticity of Supply and Its Determinants • Ability of sellers to change the amount of the good they produce. • Beach-front land is inelastic. • Books, cars, or manufactured goods are elastic. • Time period • Supply is more elastic in the long run.
- 29. • Technology improvement -with the improvement of technology producers are able to produce more-more elastic supply • Perishability -supply is inelastic for products that are not long last such as agricultural products. -change in price do not affect supply much because cannot store it in longer period.
- 30. Computing the Price Elasticity of Supply • The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price. P r i c e e l a s t i c i t y o f s u p p l y = P e r c e n t a g e c h a n g e i n q u a n t i t y s u p p l i e d P e r c e n t a g e c h a n g e i n p r i c e
- 31. THREE APPLICATIONS OF SUPPLY, DEMAND, AND ELASTICITY • Can good news for farming be bad news for farmers? • What happens to paddy farmers and the market for paddy when university agronomists discover a new paddy hybrid that is more productive than existing varieties?
- 32. Can Good News for Farming Be Bad News for Farmers? • Examine whether the supply or demand curve shifts. • Determine the direction of the shift of the curve. • Use the supply-and-demand diagram to see how the market equilibrium changes.
- 33. Figure 7 An Increase in Supply in the Market for Rice Quantity of Rice 0 Price of Rice 3. . . . and a proportionately smaller increase in quantity sold. As a result, revenue falls from RM300 to RM220. Demand S1 S2 2. . . . leads to a large fall in price . . . 1. When demand is inelastic, an increase in supply . . . 2 110 3 100
- 34. Compute the Price Elasticity of Demand When There Is a Change in Supply E D = − + − + = − ≈ − 1 0 0 1 1 0 1 0 0 1 1 0 2 3 0 0 2 0 0 3 0 0 2 0 0 2 0 0 9 5 0 4 0 2 4 ( ) / . . ( . . ) / . . . Demand is inelastic.
- 35. Summary • Price elasticity of demand measures how much the quantity demanded responds to changes in the price. • Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. – If a demand curve is elastic, total revenue falls when the price rises. – If it is inelastic, total revenue rises as the price rises.
- 36. Summary • The income elasticity of demand measures how much the quantity demanded responds to changes in consumers’ income. • The cross-price elasticity of demand measures how much the quantity demanded of one good responds to the price of another good. • The price elasticity of supply measures how much the quantity supplied responds to changes in the price.
- 37. Summary • In most markets, supply is more elastic in the long run than in the short run. • The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. • The tools of supply and demand can be applied in many different types of markets.