Professional Documents
Culture Documents
Elasticity
Elasticity
Applications
Elasticity . . .
allows us to analyze supply and demand
with greater precision.
is a measure of how much buyers and sellers
respond to changes in market conditions
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P e rc e n ta g e c h a n g e in p ric e
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P e rc e n ta g e c h a n g e in p ric e
2
( 2 .2 0 2 .0 0 )
100 10%
2 .0 0
% change in price
% change in quantity
2008
5.0
-3.2
2009
-2.5
5.6
2010
zero
1.2
2011
6.5
-2.5
2 .3 2
( 2 .2 0 2 .0 0 )
9 .5 %
( 2 .0 0 2 .2 0 ) / 2
Copyright 2004 South-Western/Thomson Learning
Solve
Suppose that business travelers and vacationers
have the following demand for airline tickets
from Delhi to Mumbai
Price
DD(Business
travelers)
DD(Vacationers)
150
2100 tickets
1,000
200
2000
800
250
1900
600
300
1800
400
Price
$5
4
67 percent
-3
- 22 percent
Demand
50
100 Quantity
Elastic Demand
Quantity demanded responds strongly to changes in
price.
Price elasticity of demand is greater than one.
Perfectly Elastic
Quantity demanded changes infinitely with any
change in price.
Unit Elastic
Quantity demanded changes by the same percentage
as the price.
Copyright 2004 South-Western/Thomson Learning
100
Quantity
$5
4
1. A 22%
increase
in price . . .
Demand
90
100
Quantity
$5
4
Demand
1. A 22%
increase
in price . . .
80
100
Quantity
$5
4
Demand
1. A 22%
increase
in price . . .
50
100
Quantity
Demand
2. At exactly $4,
consumers will
buy any quantity.
0
3. At a price below $4,
quantity demanded is infinite.
Quantity
$4
P Q = $400
(revenue)
Demand
100
Quantity
Q
Copyright2003 Southwestern/Thomson Learning
Price
Price
An Increase in price from $1
to $3
leads to an Increase in
total revenue from $100 to
$240
$3
Revenue = $240
$1
Demand
Revenue = $100
0
100
Quantity
Demand
0
80
Quantity
Price
Price
An Increase in price from $4
to $5
leads to an decrease in
total revenue from $200 to
$100
$5
$4
Demand
Demand
Revenue = $200
Revenue = $100
50
Quantity
20
Quantity
P e rc e n ta g e c h a n g e
in q u a n tity d e m a n d e d
In c o m e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e
in in c o m e
Income Elasticity
Types of Goods
Normal Goods
Inferior Goods
Income Elasticity
Goods consumers regard as necessities tend to
be income inelastic
Examples include food, fuel, clothing, utilities, and
medical services.
100
Quantity
100
110
Quantity
100
125
Quantity
100
200
Quantity
Supply
2. At exactly $4,
producers will
supply any quantity.
0
3. At a price below $4,
quantity supplied is zero.
Quantity
Time period.
Supply is more elastic in the long run.