Studies During Shut-Down

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 Elasticity of Demand
• ELASTICITY: Chapter 5
• 5.1: PP 123. What is price-
elasticity of demand? Why is
elasticity preferred over slope of
a demand curve?
• 5.2: PP 126. Calculating price-
elastiticies. Calculating elasticity,
and understanding relation
between revenue and elasticity
• 5.3: PP 132. Determinants of
demand elasticity: time,
availability of substitutes
• 5.4: PP 134. Other important
elasticities. Income-elasticity;
cross-price elasticity
• Principles of Microeconomics.
Case, Fair, Oster. 12E. 2018
 Elasticity of Demand
• The Law of Demand: When price
rises, quantity demanded falls, cet par
• Quantity demanded Qdx ‘responds’
differently with different goods.
• Price falls by 1%. How does Qdx
respond for:
Demand for essential drugs?
Demand for restaurant food?
• Price-Elasticity of Demand: How
responsive is Qdx to Price Change?
• Alfred Marshall introduced ‘Price-
Elasticity of Demand’ (PED) in
Principles of Economics, 1890.
• Essential Drugs: If price of essential
drugs falls by 1%, Qdx increases by
less than 1%. Demand for drugs
depends on doctor’s prescription. Not
on price.
• Essential Goods: Qdx does not
respond to price change: Price
Inelastic
• Restaurant Food: If price of restaurant
food falls by 1%, Qdx tends to increase
more than 1% since this is a luxury
good.
• Luxury Goods: Qdx responds more
than price change: Price Elastic
Elastic vs Inelastic Demand: 1/2
• Price falls by same amount in
both figures.
• Left Panel: ∆Qdx>∆Px. Qdx
responds more than Px change.
Price-Elastic.
• Demand: Price-sensitive; Price-
responsive; Price-elastic
• Luxury Goods: We tend to buy
more when price decreases.
Elastic vs Inelastic Demand: 2/2
• Price falls by same amount in
both figures.
• Right Panel: ∆Qdx<∆Px. Qdx
responds less than Px change.
Price-Inelastic.
• Demand: Price-Insensitive;
Price-unresponsive; Price-
inelastic
• Essential Goods: We do not tend
to buy more when price
decreases.
Perfectly Inelastic Demand
• Demand fixed by quantity, not
by price
• As price rises or falls, Qd remains
unchanged.
• Qd does not respond to change
in price
• Totally Price-Insensitive; Price-
Unresponsive
• Perfectly Price-Inelastic
• Fig 5.2: 125
Perfectly Elastic Demand
• Demand is fixed by price
• A small change in price will
result in zero demand
• Demand highly sensitive to price
• Totally price-sensitive; price-
responsive
• Perfectly elastic
• Figure 5.2: 125
 Elasticity Defined
• Price-Elasticity of Demand:
Percentage response of quantity
demanded due percentage
change in price
• Ed = %∆Q/%∆Px
• Slope of Demand: Change in
quantity demand due to change
in price
• = ∆Q/∆Px
• Qpre; Qpost; ∆Q=[Qpost-Qpre]
• %∆Q = [(Qpost – Q pre)/Qpre]
• % change is measured relatively
in relation to FIRST Q, Qpre.
• Ppre; Ppost; ∆P=[Ppost-Ppre]
• %∆P = [(Ppost – Ppre)/Ppre]
• % change is measured relatively
in relation to FIRST P, Ppre.
 Elasticity and slope are not the same
• Ed=%∆Q/%∆P
• %∆Q=(∆Q/Q)*100
• %∆P=(∆P/P)*100
• Ed=%∆Q/%∆P
• =[(∆Q/Q)*100]/[(∆P/P)*100]
• Ed=[∆Q/∆P]/[P/Q]
• Slope=[∆Q/∆P]
• Ed=SLOPE*[P/Q]
• Figure 5.1:124: Same demand.
Different slope
• Panel A: Pounds/month: -1/5
Panel B: Ounces/month: -1/80
• As units change, value of slope
changes for the same demand
• Slope depends on units,
elasticity does not- as we shall
see next