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Case Econ08 PPT 05
Case Econ08 PPT 05
Case Econ08 PPT 05
5
Elasticity
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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Elasticity
5
Chapter Outline
Types of Elasticity
Calculating Elasticities
Calculating Percentage Changes
Elasticity Is a Ratio of
Percentages
The Midpoint Formula
Elasticity Changes along a
Straight-Line
Demand Curve
Elasticity and Total Revenue
The Determinants of Demand
Elasticity
Availability of Substitutes
The Importance of Being
Unimportant
The Time Dimension
Other Important Elasticities
Income Elasticity of Demand
Cross-Price Elasticity of Demand
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ELASTICITY
%ΔA
elasticity
of A withrespect to
B=
%ΔB
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PRICE ELASTICITY OF DEMAND
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PRICE ELASTICITY OF DEMAND
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PRICE ELASTICITY OF DEMAND
TYPES OF ELASTICITY
TABLE 5.1 Hypothetical Demand Elasticities for Four Products
% CHANGE
% CHANGE IN QUANTITY
INPRICE DEMANDED ELASTICITY
PRODUCT (% P) (% QD) (% QD ÷ %P)
CHAPTER 5: Elasticity
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PRICE ELASTICITY OF DEMAND
CHAPTER 5: Elasticity
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PRICE ELASTICITY OF DEMAND
A warning: You must be very careful about signs. Because it is generally understood
that demand elasticities are negative (demand curves have a negative slope), they are
often reported and discussed without the negative sign. For example, a technical paper
might report that the demand for housing “appears to be inelastic with respect to price,
or less than 1 (0.6).” What the writer means is that the estimated elasticity is -.6, which
is between zero and -1. Its absolute value is less than 1.
CHAPTER 5: Elasticity
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PRICE ELASTICITY OF DEMAND
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PRICE ELASTICITY OF DEMAND
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CALCULATING ELASTICITIES
Q2 - Q1
x 100%
Q1
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CALCULATING ELASTICITIES
change in price
% change in price x 100%
P1
P2 - P1
x 100%
P1
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CALCULATING ELASTICITIES
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CALCULATING ELASTICITIES
Q2 - Q1
x 100%
(Q1 Q2 ) / 2
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CALCULATING ELASTICITIES
change in price
% change in price x 100%
CHAPTER 5: Elasticity
( P1 P2 ) / 2
P2 - P1
x 100%
( P1 P2 ) / 2
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CALCULATING ELASTICITIES
23 -1
% change in price x 100% x 100% - 40.0%
(3 2) / 2 2.5
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CALCULATING ELASTICITIES
ELASTICITY CHANGES ALONG A
STRAIGHT-LINE DEMAND CURVE
(PER DEMANDED
LUNCH) (LUNCHES PER
MONTH)
$11 0
10 2
9 4
8 6
7 8
6 10
5 12
4 14
3 16
FIGURE 5.3 Demand Curve for
2 18 Lunch at the Office Dining Room
1 20
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CALCULATING ELASTICITIES
TR = P x Q
CHAPTER 5: Elasticity
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CALCULATING ELASTICITIES
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CALCULATING ELASTICITIES
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THE DETERMINANTS OF DEMAND
ELASTICITY
AVAILABILITY OF SUBSTITUTES
Perhaps the most obvious factor affecting demand
elasticity is the availability of substitutes.
The elasticity of demand in the short run may be very different from the elasticity of
demand in the long run. In the longer run, demand is likely to become more elastic, or
responsive, simply because households make adjustments over time and producers
develop substitute goods.
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OTHER IMPORTANT ELASTICITIES
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OTHER IMPORTANT ELASTICITIES
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OTHER IMPORTANT ELASTICITIES
ELASTICITY OF SUPPLY
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OTHER IMPORTANT ELASTICITIES
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REVIEW TERMS AND CONCEPTS
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Appendix
Q Q
100
%Q Q Q1 Q P1
elasticity
%P P P P Q1
100
P P1
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Appendix
Q M 1
P P1
By substituting we get:
M 1 P1 M 1 P1 M1
elasticity
P1 Q1 P1 M 2 M 2
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Appendix
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