Elasticity and Its Application

Topic #4

A Presentation by Md. Abrar Fahad Khan

 Chapter Outline

The Elasticity of Demand

The Elasticity of Supply

Three Applications of Supply, Demand,

and Elasticity
The Elasticity of Demand
 A measure of the
responsiveness of quantity
Elasticity demanded or quantity
supplied to a change in one of
its determinants
 A measure of how much the quantity
Price Elasticity demanded of a good responds to a
of Demand change in the price of that good,
computed as the percentage change in
quantity demanded divided by the
percentage change in price
 Determinants of The Price
Elasticity of Demand
• Availability of Close Substitutes
• Necessities versus Luxuries
• Definition of the Market
• Time Horizon
Computing the Price Elasticity of Demand
 Computing the Price Elasticity of
Demand using The Midpoint Method
The Variety
of Demand
Curves
The Variety
of Demand
Curves
The Variety
of Demand
Curves
The Variety
of Demand
Curves
The Variety
of Demand
Curves
Total Revenue and the Price Elasticity of Demand
 How Total
Revenue
Changes When
Price Changes
 Other Demand Elasticities

Income Elasticity of Demand

• A measure of how much the quantity demanded of

a good responds to a change in consumers’ income,
computed as the percentage change in quantity
demanded divided by the percentage change in
income

Cross-Price Elasticity of Demand

• A measure of how much the quantity demanded of

one good responds to a change in the price of
another good, computed as the percentage change
in quantity demanded of the first good divided by
the percentage change in price of the second good
The Elasticity of Supply
 A measure of how much the quantity
Price Elasticity supplied of a good responds to a
of Supply change in the price of that good,
computed as the percentage change in
quantity supplied divided by the
percentage change in price
Computing the Price Elasticity of Supply
The Variety
of Supply
Curves
The Variety
of Supply
Curves
The Variety
of Supply
Curves
The Variety
of Supply
Curves
The Variety
of Supply
Curves
Three Applications of Supply, Demand, and Elasticity
Can Good News for Farming Be
Bad News for Farmers?
Why Did OPEC Fail to Keep
the Price of Oil High?
Does Drug Interdiction Increase or Decrease
Drug-Related Crime?