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UNIT 5
Elasticity...
Inelastic Demand
Quantity demanded does not respond strongly
to price changes.
Elastic Demand
Quantity demanded responds strongly to
changes in price.
Ranges of Elasticity
Perfectly Inelastic
Quantity demanded does not respond to price
changes.
Perfectly Elastic
Quantity demanded changes infinitely with any
change in price.
Unit Elastic
Quantity demanded changes by the same
percentage as the price.
The Price Elasticity of
Demand: Perfectly Inelastic
Price
Demand
$5
4
1. An
increase
in price...
0 100 Quantity
Price
1. At any price
above $4, quantity
demanded is zero.
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
0 Quantity
3. At a price below $4,
quantity demanded is infinite.
The Price Elasticity of
Demand: Unit Elastic
Price
$5
4
1. A 12.5% Demand
increase
in price...
0 80 100 Quantity
Price
$5
4 Demand
1. A 12.5%
increase
in price...
0 50 100 Quantity
Price
$6
4
1. A 25% Demand
increase
in price...
0 90 100 Quantity
Percentage Change
in Quantity Demanded
Price Elasticity of Demand =
Percentage Change
in Price
Computing the Price
Elasticity of Demand
Price
110
90 Demand
110
90 Demand
Price
$4
P X Q = $400
P
(total revenue) Demand
0 100 Quantity
Q
Elasticity and Total Revenue
Price Price
$5
$4
Demand Demand
Revenue = $200 Revenue = $100
0 50 Quantity 0 20 Quantity
Elasticity and Total Revenue
Price Price
$3
Revenue = $240
$1
Revenue = $100 Demand Demand
0 100 Quantity 0 80 Quantity
Income Elasticity of Demand
Percentage Change in
Quantity Demanded
Income Elasticity of Demand=
Percentage Change
in Income
Income Elasticity... Types
Explain the
relationship
between total
revenue and
elasticity of
demand.
Price Elasticity of Supply
Perfectly Elastic
ES =
Relatively Elastic
ES > 1
Unit Elastic
ES = 1
Ranges of Elasticity
Relatively Inelastic
ES < 1
Perfectly Inelastic
ES = 0
Price Elasticity of Supply:
Perfectly Inelastic Supply
Price
Supply
$5
1. An
increase
in price...
0 100 Quantity
Price
$6
1. A larger%
increase
in price...
Price
$5
1. A 12.5%
increase
in price...
Price
1. At any price
above $4, quantity
$5 supplied is infinite.
1. A 12.5%
2. At exactly $4,
increase
producers will
in price...
supply any quantity.
100 Quantity
3. At a price below $4,
quantity supplied is zero.
Determinants of
Elasticity of Supply
Percentage Change in
Quantity Supplied
Elasticity of Supply =
Percentage Change
in Price
Recap!
S1
$3
Demand
$3
Demand
$3
Demand
2. ...leads $3
to a large
fall in 2
price...
Demand
2. ...leads $3
to a large
fall in 2
price...
Demand
100 -110
ED = 100
3.00 - 2.00
3.00
-0.10
-0.30
0.33
Compute Elasticity
100 -110
ED = 100
3.00 - 2.00
3.00
-0.10
-0.30
0.33
Demand is inelastic
Conclusion