Price Elasticity of Dem

and
Price Elasticity and Tot
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
7
CHAPTER

Elasticity of
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms

Demand & Supply

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End
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7-1
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF DEMAND

Price Elasticity of Dem

and
Think About It...
Price Elasticity and Tot
al Revenue THE LAW OF DEMAND SAYS...
Consumers will buy more when
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
prices go down and less when
prices go up
and
Income Elasticity of De
mand
Key Terms
HOW MUCH MORE OR LESS?
DOES IT MATTER?
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to whom?
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Show Price Elasticity Provides an Answer
7-2
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF DEMAND
Measures Responsiveness to
Price Elasticity of Dem
and
Price Changes
Price Elasticity and Tot P The percentage change in quantity
al Revenue
Determinants of Price E
lasticity of Demand
The percentage change in price
Price Elasticity of Supp
ly
Cross Elasticity of Dem

.01
and
Income Elasticity of De
mand
Key Terms

P2 .02
P1
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End
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Q2 Q1 Q
7-3
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF DEMAND

Price Elasticity of Dem

Commonly Expressed as…
and
Price Elasticity and Tot P The percentage change in quantity
al Revenue
Determinants of Price E
lasticity of Demand
The percentage change in price
Price Elasticity of Supp
ly

%Q d
Cross Elasticity of Dem
and
Income Elasticity of De

% P
mand
Key Terms

P2
P1
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End
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Q2 Q1 Q
7-4
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF DEMAND
The Price-Elasticity Coefficient and Formula
Price Elasticity of Dem
and Percentage change in quantity
Price Elasticity and Tot
demanded of product X
Ed =
al Revenue
Determinants of Price E
lasticity of Demand Percentage change in price
Price Elasticity of Supp
ly of product X
Cross Elasticity of Dem
and
Income Elasticity of De
Or equivalently…
mand
Key Terms Percentage change in quantity demanded of X
Ed = Original quantity demanded of X


Change in price of X
Previous Next Original price of X
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7-5
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF DEMAND
Interpretations of Ed
Price Elasticity of Dem
and
Elastic Demand
.04
Price Elasticity and Tot
al Revenue
Determinants of Price E
lasticity of Demand Ed = =2
Price Elasticity of Supp
ly .02
Cross Elasticity of Dem
and Inelastic Demand
Income Elasticity of De
mand
.01
Key Terms
Ed = = .5
.02
Unit Elasticity
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End Ed = =1
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7-6
Copyright McGraw-Hill/Irwin, 2005
.02
 PRICE ELASTICITY OF DEMAND
Extreme Cases
Price Elasticity of Dem
and
Perfectly Inelastic Demand
Price Elasticity and Tot P D1
al Revenue
Determinants of Price E
lasticity of Demand
Ed = 0
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De 0 Q
mand
Key Terms Perfectly Elastic Demand
P

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D2
Slide Slide Ed = 
End
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7-7 0 Q
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF DEMAND

Price Elasticity of Dem

Refinement –
and
Price Elasticity and Tot
al Revenue
The Midpoint Formula
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly Change in Change in
quantity price
Cross Elasticity of Dem


and
Income Elasticity of De
mand Ed =
Key Terms
Sum of Sum of
Quantities/2 prices/2
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7-8
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 PRICE ELASTICITY & TOTAL REVENUE
When prices are So is total revenue
Price Elasticity of Dem
and low,
Price Elasticity and Tot P TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms

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End
Show
Q Quantity Demanded
7-9
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises
Price Elasticity of Dem
and with price to a
Price Elasticity and Tot P point... TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms

Previous Next D
Slide Slide
End
Show
Q Quantity Demanded
7 - 10
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises then declines
Price Elasticity of Dem
and with price to a
Price Elasticity and Tot P point... TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms

Previous Next D
Slide Slide
End
Show
Q Quantity Demanded
7 - 11
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises then declines
Price Elasticity of Dem
and with price to a
Price Elasticity and Tot P point... TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms

Previous Next D
Slide Slide
End
Show
Q Quantity Demanded
7 - 12
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises then declines
Price Elasticity of Dem
and with price to a
Price Elasticity and Tot P point... TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp

Total Revenue Test

ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms

Previous Next D
Slide Slide
End
Show
Q Quantity Demanded
7 - 13
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises then declines
Price Elasticity of Dem
and with price to a
Price Elasticity and Tot P point... TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms

Inelastic
Previous Next
Demand D Inelastic
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Demand
End
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Q Quantity Demanded
7 - 14
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises then declines
Price Elasticity of Dem
and with price to a
Price Elasticity and Tot P point... TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms
Elastic
Demand

Inelastic
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Demand D Elastic Inelastic
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Demand Demand
End
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Q Quantity Demanded
7 - 15
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE
Total revenue rises then declines
Price Elasticity of Dem
and with price to a
Price Elasticity and Tot P point... TR
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Key Terms
Elastic Unit
Demand Elastic

Inelastic
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Demand D Elastic Inelastic
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Demand Demand
End
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Q Quantity Demanded
7 - 16
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY & TOTAL REVENUE

Price Elasticity of Dem

Price Elasticity is...
and
Price Elasticity and Tot
al Revenue
Inelastic from 0 to 1
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
Typical of necessities one must have
ly
Cross Elasticity of Dem
and
Income Elasticity of De
Elastic from 1 to 
mand
Key Terms Typical of luxuries one wants

Unit elastic when exactly = 1

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revenue
7 - 17
Copyright McGraw-Hill/Irwin, 2005
 DETERMINANTS OF PRICE
ELASTICITY OF DEMAND
•Substitutability
Price Elasticity of Dem
and
Price Elasticity and Tot
al Revenue
Determinants of Price E
lasticity of Demand
•Proportion of Income
Price Elasticity of Supp
ly
•Luxuries versus Necessities
Cross Elasticity of Dem
and •Time
Income Elasticity of De
mand
Key Terms
Applications...
Large Crop Yields
Excise Taxes
Decriminalization of Illegal Drugs
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7 - 18
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Price Elasticity of Dem
and
Price Elasticity and Tot
al Revenue Percentage change in quantity
Determinants of Price E
lasticity of Demand
supplied of good X
Price Elasticity of Supp
ly
Cross Elasticity of Dem
Es= Percentage change in
and
Income Elasticity of De
mand
the price of good X
Key Terms

Now, compare the immediate

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market period, the short-run,
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and long run.
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Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Immediate Market period
Price Elasticity of Dem
and P Sm An increase in
Price Elasticity and Tot
al Revenue demand without
Determinants of Price E
lasticity of Demand
enough time to
Price Elasticity of Supp
ly
change supply
Cross Elasticity of Dem
and
causes…
Income Elasticity of De

Po
mand
Key Terms

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D1
End
Show Qo Q
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Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Immediate Market period
Price Elasticity of Dem
and P Sm An increase in
Price Elasticity and Tot
al Revenue demand without
Determinants of Price E
lasticity of Demand
enough time to
Price Elasticity of Supp
ly
change supply
Cross Elasticity of Dem
Pm causes… an
and
Income Elasticity of De increase in price
Po
mand
Key Terms

D2
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Slide
D1
End
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Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Short Run
Price Elasticity of Dem
and P Ss
Price Elasticity and Tot
al Revenue An increase in
Determinants of Price E
lasticity of Demand demand with
Price Elasticity of Supp
ly less intensity
Cross Elasticity of Dem
and
supply use
Income Elasticity of De causes...
Po
mand
Key Terms

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Next
Slide
D1
End
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Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Short Run
Price Elasticity of Dem
and P Ss
Price Elasticity and Tot
al Revenue An increase in
Determinants of Price E
lasticity of Demand demand with
Price Elasticity of Supp
ly less intensity
Cross Elasticity of Dem
and Ps supply use
Income Elasticity of De causes...a lower
Po
mand
Key Terms increase in price

D2
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D1
End
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7 - 23
Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Long Run An increase in
Price Elasticity of Dem
and P demand in the
Price Elasticity and Tot
al Revenue
long run allows
Determinants of Price E
lasticity of Demand greater change
Price Elasticity of Supp
ly causing...
Cross Elasticity of Dem
and
SL
Income Elasticity of De

Po
mand
Key Terms

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Slide
D1
End
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Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Long Run An increase in
Price Elasticity of Dem
and P demand in the
Price Elasticity and Tot
al Revenue
long run allows
Determinants of Price E
lasticity of Demand greater change
Price Elasticity of Supp
ly causing...
Cross Elasticity of Dem
and
SL
Income Elasticity of De PL Even more elastic
Po
mand
Key Terms response - less
price increase
D2
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D1
End
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Copyright McGraw-Hill/Irwin, 2005
 PRICE ELASTICITY OF SUPPLY
Price Elasticity of Dem
and
Applications of Price
Elasticity of Supply
Price Elasticity and Tot
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp
ly
Cross Elasticity of Dem

Antiques and
and
Income Elasticity of De
mand
Key Terms

Reproductions
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Volatile Gold Prices
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 CROSS ELASTICITY OF DEMAND
Price Elasticity of Dem
Percentage change in quantity
and
demanded of good X
Exy =
Price Elasticity and Tot
al Revenue
Determinants of Price E
lasticity of Demand Percentage change in
Price Elasticity of Supp
ly the price of good y
Cross Elasticity of Dem
and Positive Sign
Income Elasticity of De
mand
Key Terms
Goods are Substitutes
Negative Sign
Goods are Complementary
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7 - 27
Goods are Independent
Copyright McGraw-Hill/Irwin, 2005
 INCOME ELASTICITY OF DEMAND

Price Elasticity of Dem

Percentage change in quantity
and
demanded
Ei =
Price Elasticity and Tot
al Revenue
Determinants of Price E
lasticity of Demand Percentage change in
Price Elasticity of Supp
ly income
Cross Elasticity of Dem
and
Income Elasticity of De
mand
Positive Sign
Key Terms
Goods are Normal or
Superior
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Negative Sign
End
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7 - 28
Copyright McGraw-Hill/Irwin, 2005
price elasticity of de total-revenue test
mand price elasticity of sup
elastic demand ply
inelastic demand market period
short run
unit elasticity
long run
perfectly inelastic de
mand cross elasticity of de
mand
perfectly elastic dem income elasticity of d
andCopyright McGraw-Hill/Irwin, 2005 BACK END
Price Elasticity of Dem
and
Price Elasticity and Tot
Next: Chapter 8
al Revenue
Determinants of Price E
lasticity of Demand
Price Elasticity of Supp

Consumer Behavior
ly
Cross Elasticity of Dem
and
Income Elasticity of De

and
mand
Key Terms

Utility Maximization
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