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Elasticity

Elasticity. . “eta”. Four demand functions. P. P. D. D. Q. Q. P. P. D. D. Q. Q. Four demand functions. P. P. D. D. Q. Q. P. P. D. D. Q. Q. Four demand functions. P. P. D. D. Q. Q. P. P. D. D. Q. Q. Four demand functions. P. P. D. D. Q. Q. P. P. D.

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Elasticity

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  1. Elasticity  “eta” Lectures in Microeconomics-Charles W. Upton

  2. Four demand functions P P D D Q Q P P D D Q Q Elasticity

  3. Four demand functions P P D D Q Q P P D D Q Q Elasticity

  4. Four demand functions P P D D Q Q P P D D Q Q Elasticity

  5. Four demand functions P P D D Q Q P P D D Q Q Elasticity

  6. The notion of elasticity • The critical question: how responsive is the quantity demanded to changes in price? Elasticity

  7. The notion of elasticity • The critical question: how responsive is the quantity demanded to changes in price? • And how do we measure that? Elasticity

  8. A Definition, Sort of • We represent that by the price elasticity of demand  the ratio of the percentage change in quantity demanded to the percent change in price Elasticity

  9. An Illustration P 50 100 Q Elasticity

  10. Q = 100 – 2(20) = 60 Q = 100 – 2(18) =64 Q = 100 – 2P P 50 20 18 60 64 100 Q Elasticity

  11. Q = 100 – 2(20) = 60 Q = 100 – 2(18) =64 New v. Old P But which is the new price and which is the old price? And does it make a difference? 50 20 18 60 64 100 Q Elasticity

  12. Q = 100 – 2(20) = 60 Q = 100 – 2(18) =64 New v. Old P But which is the new price and which is the old price? And does it make a difference? 50 Yes. Lets do the calculation assuming the price goes from 20 to 18 and then from 18 to 20? 20 18 60 64 100 Q Elasticity

  13. Going from 20 to 18 P 50 20 18 60 64 100 Q Elasticity

  14. Going from 20 to 18 P 50 20 18 60 64 100 Q Elasticity

  15. Going from 20 to 18 P 50 20 18 60 64 100 Q Elasticity

  16. Going from 18 to 20 P 50 20 18 60 64 100 Q Elasticity

  17. Going from 18 to 20 P 50 20 18 60 64 100 Q Elasticity

  18. Going from 18 to 20 P 50 20 18 60 64 100 Q Elasticity

  19. Going from 18 to 20 P 50 20 18 60 64 100 Q Elasticity

  20. So what is it? Elasticity

  21. Two computational methods • Point Elasticity of Demand • Arc Elasticity of Demand Elasticity

  22. Point Elasticity of Demand • Defined by where Slope is the slope of the demand function Elasticity

  23. Point Elasticity of Demand • Defined by where Slope is the slope of the demand function In the case of a linear demand function Q = a – bP The slope is -b Elasticity

  24. Computing the Point Elasticity P 50 20 18 60 64 100 Q Elasticity

  25. Computing the Point Elasticity P 50 20 18 60 64 100 Q Elasticity

  26. Computing at Q = 60 P 50 20 18 60 64 100 Q Elasticity

  27. Computing at Q = 64 P 50 20 18 60 64 100 Q Elasticity

  28. A Problem P 50 20 Compute the point price elasticity of demand at P = 25 and P = 35 18 60 64 100 Q Elasticity

  29. A Problem P 50 20 Compute the point price elasticity of demand at P = 25 and P = 35 18 When P = 25, = -1 When P = 35, = -2.333 60 64 100 Q Elasticity

  30. For a straight line demand curve  will vary over the demand curve  along the Demand Function P 100 Q Elasticity

  31. When the curve hits the price axis,  = -  along the Demand Function P  = - 100 Q Elasticity

  32. When the curve hits the quantity axis,  = 0  along the Demand Function P  = 0 100 Q Elasticity

  33. At the midpoint,  = -1  along the Demand Function P  = -1 100 Q Elasticity

  34. Next Lecture • Arc Elasticity • Extensions Elasticity

  35. End ©2004 Charles W. Upton Elasticity

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