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Principles of
Microeconomics, 9e
; ; By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
CHAPTER 5 Elasticity
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 1 of 45
CHAPTER 5 Elasticity
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 2 of 45
PART I INTRODUCTION TO ECONOMICS
Elasticity
5
Prepared by:
Fernando & Yvonn Quijano
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster
PART I INTRODUCTION TO ECONOMICS
Elasticity
5
CHAPTER OUTLINE
Price Elasticity of Demand
Slope and Elasticity
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
CHAPTER 5 Elasticity
Availability of Substitutes
The Importance of Being Unimportant
The Time Dimension
Other Important Elasticities
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Elasticity of Supply
Looking Ahead
Appendix: Point Elasticity
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Elasticity
%A
elasticity of A with respect to B
%B
CHAPTER 5 Elasticity
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Price Elasticity of Demand
FIGURE 5.1
Changing theSlope Is measure
unit of Not a Useful Measure
from poundsof Responsiveness
to ounces changes the numerical value of
the demand slope dramatically, but the behavior of buyers in the two diagrams is
identical.
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 6 of 45
The slope of a demand curve is:
a. The best way of measuring the responsiveness in quantity
demanded to changes in price.
b. Equivalent to elasticity as a measure of responsiveness.
c. A poor measure of the responsiveness compared to
elasticity.
d. A measure of the proportional change in quantity demanded,
given a proportional change in price.
e. A negative value, while demand elasticity is always a positive
value.
CHAPTER 5 Elasticity
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The slope of a demand curve is:
a. The best way of measuring the responsiveness in quantity
demanded to changes in price.
b. Equivalent to elasticity as a measure of responsiveness.
c. A poor measure of the responsiveness compared to
elasticity.
d. A measure of the proportional change in quantity demanded,
given a proportional change in price.
e. A negative value, while demand elasticity is always a positive
value.
CHAPTER 5 Elasticity
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Price Elasticity of Demand
% change in price
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Price Elasticity of Demand
Types of Elasticity
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Price Elasticity of Demand
Types of Elasticity
CHAPTER 5 Elasticity
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When a good has few close substitutes readily available:
a. Quantity demanded is not nearly as responsive to a
change in price.
b. Price tends to remain the same, regardless of quantity
demanded.
c. Proportional changes in quantity demanded tend to be
greater than proportional changes in price.
d. Elasticity cannot be measured.
CHAPTER 5 Elasticity
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Price Elasticity of Demand
Types of Elasticity
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Price Elasticity of Demand
Types of Elasticity
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When the percentage change in quantity demanded is greater
than the percentage change in price:
a. The value of demand elasticity is greater than one.
b. The demand curve is relatively steep.
c. There are few substitutes for the good in question.
d. There is little responsiveness in quantity demanded to
changes in price.
e. All of the above.
CHAPTER 5 Elasticity
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When the percentage change in quantity demanded is greater
than the percentage change in price:
a. The value of demand elasticity is greater than one.
b. The demand curve is relatively steep.
c. There are few substitutes for the good in question.
d. There is little responsiveness in quantity demanded to
changes in price.
e. All of the above.
CHAPTER 5 Elasticity
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Price Elasticity of Demand
Types of Elasticity
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Calculating Elasticities
Q -Q
2
x 100%
1
CHAPTER 5 Elasticity
Q 1
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Calculating Elasticities
change in price
% change in price x 100%
P
CHAPTER 5 Elasticity
P -P
2
x 100% 1
P 1
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Calculating Elasticities
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Calculating Elasticities
1 2
Q -Q
2
x 100%
1
(Q Q ) / 2
1 2
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Calculating Elasticities
change in price
% change in price x 100%
(P P ) / 2
1 2
P -P
x 100%
CHAPTER 5 Elasticity
2 1
(P P ) / 2
1 2
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 23 of 45
Refer to the figure below. Using the arc elasticity formula, the
value of price elasticity of demand equals:
a. 2.5.
b. 6.0
c. 3.7.
d. 0.27.
e. None of the above.
CHAPTER 5 Elasticity
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 24 of 45
Refer to the figure below. Using the arc elasticity formula, the
value of price elasticity of demand equals:
a. 2.5.
b. 6.0
c. 3.7.
d. 0.27.
e. None of the above.
CHAPTER 5 Elasticity
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Calculating Elasticities
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Calculating Elasticities
Elasticity Changes Along a Straight-Line Demand Curve
4 14
3 16
2 18
1 20
22 FIGURE 5.3 Demand Curve for
0
Lunch at the Office Dining Room
Between points A and B, demand is quite elastic at -6.4.
Between points C and D, demand is quite inelastic at -.294.
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 27 of 45
Refer to the figure. Using the midpoint
formula, calculate the values of
elasticity between points A and B,
and then between points C and D.
Those values are, respectively:
a. –6.4 and –0.294
b. –0.1 and –4.54
c. –0.15 and –3.40
d. –0.5 and –0.5. Elasticity is the same
for both sets of points because the
demand curve is linear; thus, the
slope of the line remains constant.
CHAPTER 5 Elasticity
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 28 of 45
Refer to the figure. Using the midpoint
formula, calculate the values of
elasticity between points A and B,
and then between points C and D.
Those values are, respectively:
a. –6.4 and –0.294
b. –0.1 and –4.54
c. –0.15 and –3.40
d. –0.5 and –0.5. Elasticity is the same
for both sets of points because the
demand curve is linear; thus, the
slope of the line remains constant.
CHAPTER 5 Elasticity
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Calculating Elasticities
TR = P x Q
total revenue = price x quantity
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Calculating Elasticities
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 31 of 45
Calculating Elasticities
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 32 of 45
When demand is elastic, a decrease in price leads to:
a. A decrease in total revenue.
b. An increase in total revenue.
c. An increase in quantity demanded, but no change in revenue.
d. A change in revenue, without a change in quantity demanded.
CHAPTER 5 Elasticity
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When demand is elastic, a decrease in price leads to:
a. A decrease in total revenue.
b. An increase in total revenue.
c. An increase in quantity demanded, but no change in revenue.
d. A change in revenue, without a change in quantity demanded.
CHAPTER 5 Elasticity
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 34 of 45
The Determinants of Demand Elasticity
Availability of Substitutes
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The Determinants of Demand Elasticity
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 36 of 45
The Determinants of Demand Elasticity
Elasticities at a
Delicatessen in the Short
Run and Long Run
The graph shows the expected
relationship between long-run
and short-run demand for
Frank’s sandwiches. Notice if
you raise prices above the
current level, the expected
CHAPTER 5 Elasticity
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Other Important Elasticities
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Which of the following is a true statement?
a. The fewer substitutes available for a product, the greater the
price elasticity of demand.
b. The more time that passes, the more inelastic the demand for a
product becomes.
c. When an item represents a small portion of our total budget,
demand for that item is likely to be inelastic.
d. All of the above.
CHAPTER 5 Elasticity
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 39 of 45
Which of the following is a true statement?
a. The fewer substitutes available for a product, the greater the
price elasticity of demand.
b. The more time that passes, the more inelastic the demand for a
product becomes.
c. When an item represents a small portion of our total budget,
demand for that item is likely to be inelastic.
d. All of the above.
CHAPTER 5 Elasticity
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Other Important Elasticities
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Other Important Elasticities
Elasticity Of Supply
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Other Important Elasticities
Elasticity Of Supply
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REVIEW TERMS AND CONCEPTS
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APPENDIX
POINT ELASTICITY (OPTIONAL)
Q Q
100
%Q Q Q1 Q P1
elasticity
%P P 100 P P Q1
P P1
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APPENDIX
POINT ELASTICITY (OPTIONAL)
Q M 1
CHAPTER 5 Elasticity
P P1
By substituting we get:
M 1 P1 M 1 P1 M1
elasticity
P1 Q1 P1 M 2 M 2
© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 46 of 45
APPENDIX
POINT ELASTICITY (OPTIONAL)
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