1 / 12

Elasticity

Elasticity. Suppose that a particular variable ( B ) depends on another variable ( A ) B = f ( A …) We define the elasticity of B with respect to A as. The elasticity shows how B responds ( ceteris paribus ) to a 1 percent change in A. Price Elasticity of Demand.

chakra
Télécharger la présentation

Elasticity

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Elasticity • Suppose that a particular variable (B) depends on another variable (A) B = f(A…) • We define the elasticity of B with respect to A as • The elasticity shows how B responds (ceteris paribus) to a 1 percent change in A

  2. Price Elasticity of Demand • The most important elasticity is the price elasticity of demand • measures the change in quantity demanded caused by a change in the price of the good • EP will generally be negative • except in cases of Giffen’s paradox

  3. Distinguishing Values of EP

  4. Price Elasticity and Total Expenditure • Total expenditure on any good is equal to Total Expenditure = PQ • Using elasticity, we can determine how total expenditure changes when the price of a good changes

  5. Price Elasticity and Total Expenditure

  6. Income Elasticity of Demand • The income elasticity of demand (EI) measures the relationship between income changes and quantity changes • Normal goods  EI > 0 • Luxury goods  EI > 1 • Inferior goods  EI < 0

  7. Cross-Price Elasticity of Demand • The cross-price elasticity of demand (EQ,P’) measures the relationship between changes in the price of one good and and quantity changes in another • Gross substitutes  EQ,P’ > 0 • Gross complements  EQ,P’ < 0

  8. Linear Demand Q = a + bP + cI + dP’ where: Q = quantity demanded P = price of the good I = income P’ = price of other goods a, b, c, d = various demand parameters

  9. Linear Demand Q = a + bP + cI + dP’ • Assume that: • Q/P = b 0 (no Giffen’s paradox) • Q/I = c  0 (the good is a normal good) • Q/P’ = d ⋛ 0 (depending on whether the other good is a gross substitute or gross complement)

  10. Linear Demand • If I and P’ are held constant at I* and P’*, the demand function can be written Q = a’ + bP where a’ = a + cI* + dP’* • Note that this implies a linear demand curve • Changes in I or P’ will alter a’ and shift the demand curve

  11. Linear Demand • Along a linear demand curve, the slope (Q/P) is constant • the price elasticity of demand will not be constant along the demand curve • As price rises and quantity falls, the elasticity will become a larger negative number (b < 0)

  12. EP < -1 EP = -1 EP > -1 Linear Demand Demand becomes more elastic at higher prices P -a’/b Q a’

More Related