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Elasticity and Demand: Ninth Edition Ninth Edition
Elasticity and Demand: Ninth Edition Ninth Edition
Elasticity and Demand: Ninth Edition Ninth Edition
ninth edition
Thoma
Mauric
Chapter 6
Elasticity and Demand
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Managerial Economics,
Managerial Economics,
Managerial Economics
%Q
E
%P
6-2
Managerial Economics
6-3
Responsiveness
Elastic
%
Q % P
Unitary Elastic
%
Q % P
Inelastic
%
Q % P
Managerial Economics
%Qd = %P x E
Percentage change in price required for
a given change in quantity demanded
can be predicted as:
%P = %Qd E
6-4
Managerial Economics
6-5
Inelastic
%
Q % P
%
Q % P
%
Q % P
TR falls
No change in TR
TR rises
TR rises
No change in TR
TR falls
Quantity-effect
dominates
Price
rises
Price
falls
Unitary elastic
No dominant
effect
Price-effect
dominates
Managerial Economics
Availability of substitutes
Managerial Economics
E
P
P Q
%P
100
P
6-7
Managerial Economics
Managerial Economics
P Average Q
6-9
Managerial Economics
Computation of Elasticity at a
Point
Managerial Economics
is b Q P
6-
Managerial Economics
P
E b
Q
P
or E
PA
6-
Managerial Economics
Q P
P
E
P Q P A
Where Q P is the slope of the curved demand at
the point of measure, P and Q are values of price and
quantity demanded at the point of measure, and A is
the price-intercept of the tangent line extended to
cross the price-axis
6-
Managerial Economics
Managerial Economics
6-
Managerial Economics
Marginal Revenue
Marginal revenue (MR) is the change
in total revenue per unit change in
output
Since MR measures the rate of
change in total revenue as quantity
changes, MR is the slope of the total
revenue (TR) curve
TR
MR
Q
6-
Managerial Economics
6-
TR = P Q
MR = TR/ Q
Price
$4.50
4.00
$4.00
$4.00
3.50
$7.00
$3.00
3.10
$9.30
$2.30
2.80
$11.20
$1.90
2.40
$12.00
$0.80
2.00
$12.00
$0
1.50
$10.50
$-1.50
--
Managerial Economics
Panel A
6-
(Figure 6.4)
Panel B
Managerial Economics
MR = A + 2BQ
6-
Managerial Economics
6-
Managerial Economics
Total revenue
MR > 0
TR increases as
Q increases
(P decreases)
MR = 0
MR < 0
6-
Price elasticity
of demand
Elastic
Elastic
( E( >E1) > 1)
Unitelastic
elastic
Unit
TR is maximized
E = 1)
( E (= 1)
TR decreases as Inelastic
Inelastic
Q increases
(
E
<
1)
(
E
<
1)
(P decreases)
Managerial Economics
1
MR P 1
E
6-
Managerial Economics
Income Elasticity
Income elasticity (EM) measures the
responsiveness of quantity demanded
to changes in income, holding the price
of the good & all other demand
determinants constant
Positive for a normal good
Negative for an inferior good
EM
6-
%Qd Qd M
%M
M Qd
Managerial Economics
Cross-Price Elasticity
Cross-price elasticity (EXY) measures the
responsiveness of quantity demanded of
good X to changes in the price of related
good Y, holding the price of good X & all
other demand determinants for good X
constant
Positive when the two goods are substitutes
Negative when the two goods are complements
E XY
6-
%Q X Q X PY
%PY
PY Q X
Managerial Economics
6-
EM
Q Average M
M Average Q
E XR
Q Average PR
PR Average Q
Managerial Economics
6-
EM
M
c
Q
E XR
PR
d
Q