2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

Prepared by:
Fernando & Yvonn 0u|jano
5
apter
E|ast|c|ty
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apter 0ut||ne
5
Elasticity
Pr|ce E|ast|c|ty of 0emand
3|ope ard E|asl|c|ly
Types ol E|asl|c|ly
a|cu|at|ng E|ast|c|t|es
Ca|cu|al|rg Percerlage Crarges
E|asl|c|ly ls a Ral|o ol Percerlages
Tre V|dpo|rl Forru|a
E|asl|c|ly Crarges a|org a 3lra|grl-L|re
0erard Curve
E|asl|c|ly ard Tola| Reverue
Te 0eterm|nants of 0emand E|ast|c|ty
Ava||ao|||ly ol 3uosl|lules
Tre lrporlarce ol 8e|rg ur|rporlarl
Tre T|re 0|rers|or
0ter |mportant E|ast|c|t|es
lrcore E|asl|c|ly ol 0erard
Cross-Pr|ce E|asl|c|ly ol 0erard
E|asl|c|ly ol 3upp|y
Look|ng Aead
Append|x: Po|nt E|ast|c|ty
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ELA8T||TY
e|ast|c|ty A gerera| corcepl used lo quarl|ly
lre resporse |r ore var|ao|e Wrer arolrer
var|ao|e crarges.

respect to with oI elasticity

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PR|E ELA8T||TY 0F 0EHAN0
8L0PE AN0 ELA8T||TY
F|CURE 5.1 8|ope |s Not a Usefu| Heasure of Respons|veness
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PR|E ELA8T||TY 0F 0EHAN0
pr|ce e|ast|c|ty of demand Tre ral|o ol lre
percerlage ol crarge |r quarl|ly
derarded lo lre percerlage ol crarge |r pr|ce;
reasures lre respors|veress ol derard lo
crarges |r pr|ce.
price in change
demanded quantity in change
demand oI elasticity price
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PR|E ELA8T||TY 0F 0EHAN0
TYPE8 0F ELA8T||TY
TALE 5.1 hypotet|ca| 0emand E|ast|c|t|es for Four Products
PR00UT
7 hANCE
|NPR|E
(7 !
7 hANCE
|N 0UANT|TY 0EHAN0E0
(7 "
0
ELA8T||TY
(7 "
0
7!
lrsu||r 10 0 0.0 Perlecl|y |re|asl|c
8as|c le|eprore serv|ce 10 -1 -0.1 lre|asl|c
8eel 10 -10 -1.0 ur|lar||y e|asl|c
8araras 10 -30 -3.0 E|asl|c
perfect|y |ne|ast|c demand 0erard |r Wr|cr
quarl|ly derarded does rol respord al a|| lo a
crarge |r pr|ce.
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PR|E ELA8T||TY 0F 0EHAN0
F|CURE 5.2 Perfect|y E|ast|c and Perfect|y |ne|ast|c 0emand urves
|ne|ast|c demand 0erard lral respords soreWral,
oul rol a greal dea|, lo crarges |r pr|ce. lre|asl|c
derard a|Ways ras a rurer|ca| va|ue oelWeer zero
ard -1.
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PR|E ELA8T||TY 0F 0EHAN0
un|tary e|ast|c|ty A derard re|al|orsr|p |r
Wr|cr lre percerlage crarge |r quarl|ly ol a
producl derarded |s lre sare as lre
percerlage crarge |r pr|ce |r aoso|ule va|ue (a
derard e|asl|c|ly ol -1.
A warning: You must be very carefuI about signs. Because it is generaIIy understood
that demand eIasticities are negative (demand curves have a negative sIope), they are
often reported and discussed without the negative sign. For exampIe, a technicaI paper
might report that the demand for housing "appears to be ineIastic with respect to price,
or Iess than 1 (0.6)." What the writer means is that the estimated eIasticity is -.6, which
is between zero and -1. Its absoIute vaIue is Iess than 1.
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PR|E ELA8T||TY 0F 0EHAN0
e|ast|c demand A derard re|al|orsr|p |r
Wr|cr lre percerlage crarge |r quarl|ly
derarded |s |arger |r aoso|ule va|ue lrar lre
percerlage
crarge |r pr|ce (a derard e|asl|c|ly
W|lr ar aoso|ule va|ue grealer lrar 1.
perfect|y e|ast|c demand 0erard |r Wr|cr
quarl|ly drops lo zero al lre
s||grlesl |rcrease |r pr|ce.
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PR|E ELA8T||TY 0F 0EHAN0
A good Way lo rereroer lre d|llererce oelWeer lre lWo
'perlecl e|asl|c|l|es |s:
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ALULAT|NC ELA8T||T|E8
ALULAT|NC PERENTACE hANCE8
x
demanded quantity in change
demanded quantity in change

"

x
-

"
" "

To ca|cu|ale percerlage crarge |r quarl|ly derarded us|rg lre |r|l|a|

va|ue as lre oase, lre lo||oW|rg lorru|a |s used:
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ALULAT|NC ELA8T||T|E8
e car ca|cu|ale lre percerlage crarge |r pr|ce |r a s|r||ar Way.
0rce aga|r, |el us use lre |r|l|a| va|ue ol !lral |s, !
1
as lre oase
lor ca|cu|al|rg lre percerlage. 8y us|rg !
1
as lre oase, lre lorru|a lor
ca|cu|al|rg lre percerlage ol crarge |r ! |s s|rp|y:
x
price in change
price in change

x
-

!
! !

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ALULAT|NC ELA8T||T|E8
0rce a|| lre crarges |r quarl|ly derarded ard pr|ce rave oeer
corverled |rlo percerlages, ca|cu|al|rg e|asl|c|ly |s a raller ol s|rp|e
d|v|s|or. Reca|| lre lorra| del|r|l|or ol e|asl|c|ly:
ELA8T||TY |8 A RAT|0 0F PERENTACE8
price in change
demanded quantity in change
demand oI elasticity price
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ALULAT|NC ELA8T||T|E8
ELA8T||TY AN0 T0TAL REVENUE
%# ! x "
total revenue price x quantity
lr ary rar|el, ! x " |s lola| reverue (%# rece|ved oy producers:
rer pr|ce (! dec||res, quarl|ly derarded ("
0
|rcreases. Tre lWo
laclors, ! ard "
0
, rove |r oppos|le d|recl|ors:
Effects of price changes
on quantity demanded:
GF
G F

and

D
D
" !
" !
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ALULAT|NC ELA8T||T|E8
8ecause lola| reverue |s lre producl ol ! ard ", Wrelrer %# r|ses or
la||s |r resporse lo a pr|ce |rcrease deperds or Wr|cr |s o|gger, lre
percerlage |rcrease |r pr|ce or lre percerlage decrease |r quarl|ly
derarded.
ll lre percerlage dec||re |r quarl|ly derarded lo||oW|rg a pr|ce
|rcrease |s |arger lrar lre percerlage |rcrease |r pr|ce, lola| reverue
W||| la||.
Effects of price increase on
a product with inelastic demand:
G x
D
%# " !
Effects of price increase on
a product with inelastic demand:
G G x
D
%# " !
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ALULAT|NC ELA8T||T|E8
Tre oppos|le |s lrue lor a pr|ce cul. rer derard |s e|asl|c, a cul |r
pr|ce |rcreases lola| reverues:
rer derard |s |re|asl|c, a cul |r pr|ce reduces lola| reverues:
effect of price cut on a product
with elastic demand:
G x
D
%# " !
effect of price cut on a product
with inelastic demand:
G G x
D
%# " !
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ThE 0ETERH|NANT8 0F 0EHAN0 ELA8T||TY
Perraps lre rosl oov|ous laclor allecl|rg derard e|asl|c|ly |s lre
ava||ao|||ly ol suosl|lules.
AVA|LA|L|TY 0F 8U8T|TUTE8
rer ar |ler represerls a re|al|ve|y sra|| parl ol our lola| oudgel, We
lerd lo pay ||ll|e allerl|or lo |ls pr|ce.
ThE |HP0RTANE 0F E|NC UN|HP0RTANT
ThE T|HE 0|HEN8|0N
%he eIasticity of demand in the short run may be very different from the eIasticity of
demand in the Iong run. In the Ionger run, demand is IikeIy to become more eIastic, or
responsive, simpIy because househoIds make adjustments over time and producers
deveIop substitute goods.
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0ThER |HP0RTANT ELA8T||T|E8
|N0HE ELA8T||TY 0F 0EHAN0
|ncome e|ast|c|ty of demand Veasures lre
respors|veress ol derard lo crarges |r |rcore.
income in change
demanded quantity in change
demand oI elasticity income
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0ThER |HP0RTANT ELA8T||T|E8
R088-PR|E ELA8T||TY 0F 0EHAN0
cross-pr|ce e|ast|c|ty of demand A reasure ol lre
resporse ol lre quarl|ly ol ore good derarded lo a
crarge |r lre pr|ce ol arolrer good.

oI price in change
demanded oI quantity in change
demand oI elasticity price - cross
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0ThER |HP0RTANT ELA8T||T|E8
ELA8T||TY 0F 8UPPLY
e|ast|c|ty of supp|y A reasure ol lre resporse ol
quarl|ly ol a good supp||ed lo a crarge |r pr|ce ol lral
good. L||e|y lo oe pos|l|ve |r oulpul rar|els.
price in change
supplied quantity in change
supply oI elasticity
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0ThER |HP0RTANT ELA8T||T|E8
e|ast|c|ty of |abor supp|y A reasure ol lre
resporse ol |aoor supp||ed lo a crarge |r lre pr|ce ol
|aoor.
rate wage in the change
supplied labor oI quantity in change
supply labor oI elasticity
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cross-pr|ce e|asl|c|ly ol
derard
e|asl|c derard
e|asl|c|ly
e|asl|c|ly ol |aoor supp|y
e|asl|c|ly ol supp|y
|rcore e|asl|c|ly ol
derard
|re|asl|c derard
perlecl|y e|asl|c derard
perlecl|y |re|asl|c
derard
pr|ce e|asl|c|ly ol derard
ur|lary e|asl|c|ly
REV|Ew TERH8 AN0 0NEPT8