Elasticity: The Responsiveness of Demand and Supply
Elasticity: The Responsiveness of Demand and Supply ARE 1150
Popular in Principles of Agriculture & Resource Economics
Popular in Agricultural & Resource Econ
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This 0 page Class Notes was uploaded by Caitrín Hall on Tuesday March 22, 2016. The Class Notes belongs to ARE 1150 at University of Connecticut taught by Emma Bojinova in Spring 2016. Since its upload, it has received 20 views. For similar materials see Principles of Agriculture & Resource Economics in Agricultural & Resource Econ at University of Connecticut.
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Date Created: 03/22/16
Chapter 6 Elasticity The Responsiveness of Demand and Supply Elasticity a measure of how much one economic variable responds to changes in another economic variable 61 The Price Elasticity of Demand and Its Measurements Price elasticity of demand the responsiveness of the qty demanded to a change in price measured by dividing the percentage change in the qty demanded of a product by the percentage change in the product s price Measuring the Price Elasticity of Demand Price elasticity of demand Change in qty demanded Change in price 0 Not the same as the slope of the demand curve 0 Since it is always negative we compare their absolute values Elastic Demand and Inelastic Demand 0 Elastic demand percentage change in qty demanded gt percentage change in price price elasticity gt 1 in absolute value Inelastic demand percentage change in qty demanded lt percentage change in price price elasticity lt 1 in absolute value Unitelastic demand percentage change in qty demanded percentage change in price price elasticity 1 in absolute value The Midpoint Formula Ensures that we have only 1 value of the price elasticity of demand between the same 2 points on a demand curve 0 Uses the average of initial and nal quantities and initial and nal pnces Q2 Qi P2 E 91sz 39 ma Q and P1 are initial values while 02 and P2 are nal values When Demand Curves Intersect the Flatter Curve is More Elastic Elasticity does NOT equal slope Slope uses changes in qty and price Elasticity uses percentage changes Smaller slope in absolute value atter demand curve more elastic Larger slope in absolute value steeper demand curve less elastic Polar Cases of Perfectly Elastic and Perfectly Inelastic Demand Perfectly inelastic demand qty demanded is completely unresponsive to price price elasticity of demand O Perfectly elastic demand qty demanded is in nitely responsive to price price elasticity of demand in nity 62 The Determinants of the Price Elasticity of Demand Availability of Close Substitutes Most important determinant of price elasticity of demand because how consumers react to a change in the price of a product depends on what alternatives they have o If a product has more substitutes available it will have more elastic demand If a product has fewer substitutes available it will have less elastic demand Passage of Time 0 Consumers take time to adjust to price change 0 The more time that passes l more elastic the demand for a product becomes Luxuries versus Necessities Luxuries have more elastic demand curves than necessities De nition of the Market Narrowly de ned market consumers have more substitutes More narrowly de ned market more elastic Share of a Good in a Consumer s Budget Goods that take a small fraction of a consumer s budget l less elastic Demand for a good will be more elastic the larger the share of the good in the average consumer s budget 63 The Relationship between Price Elasticity of Demand and Total Revenue 0 Total revenue the total amount of funds received by a seller of a goodservice calculated by multiplying price per unit by the number of units sold TR PQ Elasticity and Revenue with a Linear Demand Curve llf demaind lie llri ellla Stile ilnelllaele unlit ellaetlie IL lll1 lit ellaetlle Elastic Increase in qty demanded gt increase in price Inelastic Increase in qty demanded lt increase in price I jlll lElll l elllaetiie arr iilnereaee liln pride renueee revenue ellaetiile a deereaee llri partiee llrnereaeee revenue arr lilnereaee llri prllee llnGlFEEEEE revenue a decrease in price reduces revenue ah lilnereaee ilri Farflee eee net afieet revenue a eereaee ilri priee deee net affect revenue Unit elastic becausequot the deereaee in quantity demanded lie prepertilenalily greaterthan the increase in pdee the iiinereaee iilri quantith demanded lie prepertlilenally greater than the deereaee in prime the deereaee iilri iuantii39rty demanded lie parepdartiienallly emailier than the llnereaee lln pride the iiinereaee in quantity demanded lie prepartiiienalllly email ier than the deereaee iiiri priiiee the decrease in quantity ernanedl lie prepadienailly me same as the iiinereaee iiin pride the llnereaee in quantity demanded lie erepertiiienalllly the same as the deereaae lin priiiee Increase in qty demanded increase in price Estimating Price Elasticity of Demand To estimate price elasticity a rm must know the demand curve for its product For a wellestablished product economists can use historical data to statistically estimate the demand curve To calculate price elasticity of demand for a new product rms often rely on market experiments Market experiments rms try different prices and observe change in qty demanded 64 Other Demand Elastics Crossprice elasticity of demand percentage change in qty demanded of one good divided by percentage change in price of another good Change in qty demanded for 1 good change in price for another their the ereaaupriee if the elasticity e f demand graduate are will be Example substitutes paeitirre Twat bra nda al tablet eempiutera eempiementa negative Tablet campirilera and apeliicatiena diwnlleaded fm aniline stares unrelated zerei labial cmpiutgera and eanlut batter Income elasticity of demand a measure of the responsiveness of qty demanded to changes in income measured by the percentage If the iiiaeame ellaatiieiity at demand is than the geed likes Eeampie peailiae bul less than 1 inerrrlai and a aeeeaai ty Bread peei tiva and greater than 1 nermall and a luxury Caviar negative inieriar Highfat meal change in qty demanded divided by percentage change in income Change in qty demanded change in income 65 Using Elasticity to Analyze the Disappearing Family Farm 0 Rapid increases in wheat farm productivity caused supply curve to shift far right 0 Since income elasticity of demand was low for wheat l demand for wheat increased only slightly 0 Because the demand for wheat is inelastic large shift in supply curve amp small shift in demand curve results in sharp decline in price of wheat 66 The Price Elasticity of Supply and Its Measurement 0 Price elasticity of supply responsiveness of the qty supplied to a change in price measured by dividing the percentage change in qty supplied of a product by the percentage change in the product s price Price elasticity ofsuppy change in qty supplied change in price 0 Price elasticity gt 1 in absolute value l elastic supply 0 Price elasticity lt 1 in absolute value l inelastic supply 0 Price elasticity of supply 1 in absolute value l unit elastic Determinants of the Price Elasticity of Supply 0 Ability and willingness of rms to alter the qty they produce as price increases 0 Often rms have dif culty increasing qty of their product during a If supply is than the vale e at prie e ellaatieity ie E Elleslii greater that 1 11 An 3 percent inereaee inpriee inelastic leaa than 1 1 Art El percent increase in priee short period of time Priee ream T Evenly ate h l lil lll LEI Quantity EEIJEEE E EU percent inereaee in quantity enameled FlfiEE i Ee T 33 In 3 LUCIE LUSH Quantity 2 eaueee a 5 pereent inereaae ll39ll quantity au Implied Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply next page unwit lagtic perfectly Eilalstic gpermct ly liiMElESt iiE equal to 1 111 A w 8 percent iincreaae fun price equal 10 in nity Any increase in price causestlhe pa rce nltawge c hamgein39lhe quantity summed to been me inn nita aquaquot t0 0 AH gradecraasa impuriua 4430 P ce 400 3 F0 T 4 0 11000 1080 Quantiw causes an 8 percent increase in quantity supplied Price EU I 400 pp y 39039 Quantity Price Stu ppll jr DD 39 3939 3 man Quantity mumsm GHEHQE inElbaquantitysupplied
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