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Chapter 7 Elasticity of Demand and Supply

Chapter 7 Elasticity of Demand and Supply. Demand Elasticity (Price Elasticity of Demand). E d =  (%∆Q d )/(%∆P)  = { (Q d2 - Q d1 )/[(Q d1 + Q d2 )/2]}/ {(P 2 – P 1 )/[(P 1 + P 2 )/2]}  E d represented as positive by convention, though actually always negative

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Chapter 7 Elasticity of Demand and Supply

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  1. Chapter 7Elasticity of Demand and Supply

  2. Demand Elasticity(Price Elasticity of Demand) • Ed = (%∆Qd)/(%∆P) = {(Qd2 - Qd1)/[(Qd1 + Qd2)/2]}/ {(P2 – P1)/[(P1 + P2)/2]} • Ed represented as positive by convention, though actually always negative • due to downward-sloping demand curve • hence always take absolute value

  3. Chapter 20 Figure 20.1(a)

  4. Chapter 20 Figure 20.1(b)

  5. Chapter 20 Table 20.1

  6. Chapter 20 Figure 20.2(a)

  7. Determinants of Price Elasticity of Demand Demand tends to be more elastic or less inelastic: • if the good is a luxury; • the longer the time period; • the greater the number of close substitutes; and • the more narrowly defined the market.

  8. Determinants of Price Elasticity of Demand Demand tends to be more inelastic or less elastic: • if the good is a necessity; • the shorter the adjustment time; • if there are few good substitutes; and • the more broadly defined the market.

  9. Chapter 20 Figure 20.2(b) Total Revenue and Elasticity

  10. Chapter 20 Table 20.2

  11. ComputingDemand Elasticity Demand for Ice Cream ED = (8 - 10) / 9 2.20 ($2.20 - $2.00) / $2.10 2.00 8 10

  12. Computing Demand Elasticity Demand for Ice Cream ED = (22%) 2.20 (9.5%) 2.00 8 10

  13. Computing Demand Elasticity Demand for Ice Cream ED 2.32 = 2.20 2.00 8 10

  14. Computing Demand Elasticity Demand for Ice Cream Demand is Elastic ED 2.32 = 2.20 2.00 8 10

  15. Chapter 20 Table 20.3

  16. Supply Elasticity(Price Elasticity of Supply) • Es = (%∆Qs)/(%∆P) = {(Qs2 - Qs1)/[(Qs1 + Qs2)/2]}/ {(P2 – P1)/[(P1 + P2)/2]} • Es always positive • due to upward-sloping demand curve • hence never take absolute value

  17. Chapter 20 Figure 20.3(a)

  18. Chapter 20 Figure 20.3(b)

  19. Chapter 20 Figure 20.3(c)

  20. Cross Elasticities(Cross-Price Elasticity of Demand) • Exy = (%∆Qdx)/(%∆Py) • = {(Qdx2 - Qdx1)/[(Qdx1 + Qdx2)/2]}/ {(Py2 – Py1)/[(Py1 + Py2)/2]} • Exy measures responsiveness of the demand for x to changes in the price of y • Positive for substitutes • Negative for complements • never take absolute value

  21. Income Elasticities(Income Elasticity of Demand) • Ei = (%∆Qd)/(%∆Y) = {(Qd2 - Qd1)/[(Qd1 + Qd2)/2]}/ {(Y2 – Y1)/[(Y1 + Y2)/2]} • Ei measures responsiveness of demand for x to changes in (average) consumer income • Positive for normal goods • Negative for inferior goods • never take absolute value

  22. Chapter 20 Table 20.4

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