Copyright © 2004 South-Western/Thomson Learning Elasticity = Responsiveness Allow us to analyze S &...
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Copyright © 2004 South-Western/Thomson Learning Elasticity = Responsiveness • Allow us to analyze S & D with greater precision. • Are measures of how much buyers and sellers respond to changes in market conditions. • BY HOW MUCH?
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Transcript of Copyright © 2004 South-Western/Thomson Learning Elasticity = Responsiveness Allow us to analyze S &...
Copyright © 2004 South-Western/Thomson Learning
Elasticity = Responsiveness
• Allow us to analyze S & D with greater precision.
• Are measures of how much buyers and sellers respond to changes in market conditions.
• BY HOW MUCH?
Copyright © 2004 South-Western/Thomson Learning
• For any market shock…
• Examine if 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.
Price Elasticity of Demand/Supply
Copyright © 2004 South-Western/Thomson Learning
An Example of Price Elasticity of Demand
• Can good news for farming be bad news for farmers?
• What happens to wheat farmers and the market for wheat when scientists discover a new more productive wheat hybrid?
Figure 8 An Increase in Supply in the Market for Wheat
Copyright©2003 Southwestern/Thomson Learning
Quantity ofWheat
0
Price ofWheat
3. . . . and a proportionately smallerincrease in quantity sold. As a result,revenue falls from $300 to $220.
Demand
S1 S2
2. . . . leadsto a large fallin price . . .
1. When demand is inelastic,an increase in supply . . .
2
110
$3
100
Figure 8 An Increase in Supply in the Market for Wheat
Copyright©2003 Southwestern/Thomson Learning
$220
Copyright © 2004 South-Western/Thomson Learning
Summary
• Price elasticity of demand measures how much the Qd responds to changes in the P.• Change in S, P adjusts, Q responds, Law of D
• Price elasticity of demand is calculated as the % change in Qd divided by the % change in P.
• Demand is typically more elastic in the long run than in the short run.
Copyright © 2004 South-Western/Thomson Learning
Summary
• If a demand curve is elastic, total revenue falls when the price rises.
• If a demand curve is inelastic, total revenue rises as the price rises.
• Don’t memorize this, test it, use logic
Copyright © 2004 South-Western/Thomson Learning
Elasticity of a Linear Demand Curve
•Draw this D curve•Calculate Total Revenue•Calculate Elasticity
Copyright © 2004 South-Western/Thomson Learning
Summary
• The price elasticity of supply measures how much the Qs responds to changes in the P.• Change in D, P adjusts, Qs responds, Law of S
• The price elasticity of supply is calculated as the % change in Qs divided by the % change in P.
• Supply is typically more elastic in the long run than in the short run.
Copyright © 2004 South-Western/Thomson Learning
Summary
• Income elasticity measures how much the Qd responds to changes in consumers’ income.• normal good (+), inferior good (-)
• luxury good (>1), necessity good (<1)
• Cross-price elasticity measures how much the Qd of one good responds to changes in the price of another good.• complement goods (-), substitute goods (+)
