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Elasticity and Its Applications
Elasticity . . . ,[object Object],[object Object]
THE ELASTICITY OF DEMAND ,[object Object],[object Object]
The Price Elasticity of Demand and Its Determinants ,[object Object],[object Object],[object Object],[object Object]
The Price Elasticity of Demand and Its Determinants ,[object Object],[object Object],[object Object],[object Object],[object Object]
Computing the Price Elasticity of Demand ,[object Object]
[object Object],Computing the Price Elasticity of Demand
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities ,[object Object]
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities ,[object Object]
The Variety of Demand Curves ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Computing the Price Elasticity of Demand Demand is price elastic $5 4 Demand Quantity 100 0 50 Price
The Variety of Demand Curves ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Variety of Demand Curves ,[object Object]
Figure 1 The Price Elasticity of Demand Copyright©2003  Southwestern/Thomson Learning (a) Perfectly Inelastic Demand: Elasticity Equals 0 Quantity 0 Price $5 4 Demand 100 1. An increase in price . . . 2. . . . leaves the quantity demanded unchanged.
Figure 1 The Price Elasticity of Demand (b) Inelastic Demand: Elasticity Is Less Than 1 Quantity 0 Price $5 90 Demand 1. A 22% increase in price . . . 2. . . . leads to an 11% decrease in quantity demanded. 4 100
Figure 1 The Price Elasticity of Demand Copyright©2003  Southwestern/Thomson Learning (c) Unit Elastic Demand: Elasticity Equals 1 Quantity 0 Price 2. . . . leads to a 22% decrease in quantity demanded. 4 100 $5 80 1. A 22% increase in price . . . Demand
Figure 1 The Price Elasticity of Demand (d) Elastic Demand: Elasticity Is Greater Than 1 Quantity 0 Price Demand 4 100 $5 50 1. A 22% increase in price . . . 2. . . . leads to a 67% decrease in quantity demanded.
Figure 1 The Price Elasticity of Demand (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price $4 Demand 2. At exactly $4, consumers will buy any quantity. 1. At any price above $4, quantity demanded is zero. 3. At a price below $4, quantity demanded is infinite.
Total Revenue and the Price Elasticity of Demand ,[object Object],[object Object],[object Object]
Figure 2 Total Revenue Copyright©2003  Southwestern/Thomson Learning Quantity 0 Price Demand Q P P  ×  Q  = $400 (revenue) $4 100
Elasticity and Total Revenue along a Linear Demand Curve ,[object Object]
Figure 3 How Total Revenue Changes When Price Changes: Inelastic Demand Copyright©2003  Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from $1 to $3 … …  leads to an Increase in total revenue from $100 to $240 Demand Revenue =  $100  Revenue = $240  Demand $1 100 $3 80
Elasticity and Total Revenue along a Linear Demand Curve ,[object Object]
Figure 4 How Total Revenue Changes When Price Changes: Elastic Demand Copyright©2003  Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from $4 to $5 … …  leads to an decrease in total revenue from $200 to $100 Demand Revenue = $200  $4 50 Demand Revenue = $100  $5 20
Elasticity of a Linear Demand Curve
Income Elasticity of Demand ,[object Object],[object Object]
Computing Income Elasticity
Income Elasticity ,[object Object],[object Object],[object Object],[object Object]
Income Elasticity ,[object Object],[object Object],[object Object],[object Object]
THE ELASTICITY OF SUPPLY ,[object Object],[object Object]
Figure 6 The Price Elasticity of Supply Copyright©2003  Southwestern/Thomson Learning (a) Perfectly Inelastic Supply: Elasticity Equals 0 Quantity 100 0 Price $5 4 Supply 1. An increase in price . . . 2. . . . leaves the quantity supplied unchanged.
Figure 6 The Price Elasticity of Supply Copyright©2003  Southwestern/Thomson Learning (b) Inelastic Supply: Elasticity Is Less Than 1 Quantity 0 Price 110 $5 100 4 1. A 22% increase in price . . . 2. . . . leads to a 10% increase in quantity supplied. Supply
Figure 6 The Price Elasticity of Supply Copyright©2003  Southwestern/Thomson Learning (c) Unit Elastic Supply: Elasticity Equals 1 Quantity 0 Price 125 $5 100 4 2.  . . . leads to a 22% increase in quantity supplied. 1. A 22% increase in price . . . Supply
Figure 6 The Price Elasticity of Supply Copyright©2003  Southwestern/Thomson Learning (d) Elastic Supply: Elasticity Is Greater Than 1 Quantity 0 Price 1. A 22% increase in price . . . 2. . . . leads to a 67% increase in quantity supplied. 4 100 $5 200 Supply
Figure 6 The Price Elasticity of Supply Copyright©2003  Southwestern/Thomson Learning (e) Perfectly Elastic Supply: Elasticity Equals Infinity Quantity 0 Price $4 Supply 3. At a price below $4, quantity supplied is zero. 2. At exactly $4, producers will supply any quantity. 1. At any price above $4, quantity supplied is infinite.
Determinants of Elasticity of Supply ,[object Object],[object Object],[object Object],[object Object],[object Object]
Computing the Price Elasticity of Supply ,[object Object]
APPLICATION of ELASTICITY ,[object Object],[object Object]
THE APPLICATION OF SUPPLY, DEMAND, AND ELASTICITY ,[object Object],[object Object],[object Object]
Figure 8 An Increase in Supply in the Market for Wheat Copyright©2003  Southwestern/Thomson Learning Quantity of Wheat 0 Price of Wheat 3.  . . . and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220.  Demand S 1 S 2 2. . . . leads to a large fall in price . . . 1. When demand is inelastic, an increase in supply . . . 2 110 $3 100
Compute the Price Elasticity of Supply Supply is inelastic
Summary ,[object Object],[object Object],[object Object],[object Object]
Summary ,[object Object],[object Object],[object Object]
Summary ,[object Object],[object Object],[object Object]

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Elasticity Concepts

  • 1. Elasticity and Its Applications
  • 2.
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  • 9.
  • 10.
  • 11. Computing the Price Elasticity of Demand Demand is price elastic $5 4 Demand Quantity 100 0 50 Price
  • 12.
  • 13.
  • 14. Figure 1 The Price Elasticity of Demand Copyright©2003 Southwestern/Thomson Learning (a) Perfectly Inelastic Demand: Elasticity Equals 0 Quantity 0 Price $5 4 Demand 100 1. An increase in price . . . 2. . . . leaves the quantity demanded unchanged.
  • 15. Figure 1 The Price Elasticity of Demand (b) Inelastic Demand: Elasticity Is Less Than 1 Quantity 0 Price $5 90 Demand 1. A 22% increase in price . . . 2. . . . leads to an 11% decrease in quantity demanded. 4 100
  • 16. Figure 1 The Price Elasticity of Demand Copyright©2003 Southwestern/Thomson Learning (c) Unit Elastic Demand: Elasticity Equals 1 Quantity 0 Price 2. . . . leads to a 22% decrease in quantity demanded. 4 100 $5 80 1. A 22% increase in price . . . Demand
  • 17. Figure 1 The Price Elasticity of Demand (d) Elastic Demand: Elasticity Is Greater Than 1 Quantity 0 Price Demand 4 100 $5 50 1. A 22% increase in price . . . 2. . . . leads to a 67% decrease in quantity demanded.
  • 18. Figure 1 The Price Elasticity of Demand (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price $4 Demand 2. At exactly $4, consumers will buy any quantity. 1. At any price above $4, quantity demanded is zero. 3. At a price below $4, quantity demanded is infinite.
  • 19.
  • 20. Figure 2 Total Revenue Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Demand Q P P × Q = $400 (revenue) $4 100
  • 21.
  • 22. Figure 3 How Total Revenue Changes When Price Changes: Inelastic Demand Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from $1 to $3 … … leads to an Increase in total revenue from $100 to $240 Demand Revenue = $100 Revenue = $240 Demand $1 100 $3 80
  • 23.
  • 24. Figure 4 How Total Revenue Changes When Price Changes: Elastic Demand Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from $4 to $5 … … leads to an decrease in total revenue from $200 to $100 Demand Revenue = $200 $4 50 Demand Revenue = $100 $5 20
  • 25. Elasticity of a Linear Demand Curve
  • 26.
  • 28.
  • 29.
  • 30.
  • 31. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (a) Perfectly Inelastic Supply: Elasticity Equals 0 Quantity 100 0 Price $5 4 Supply 1. An increase in price . . . 2. . . . leaves the quantity supplied unchanged.
  • 32. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (b) Inelastic Supply: Elasticity Is Less Than 1 Quantity 0 Price 110 $5 100 4 1. A 22% increase in price . . . 2. . . . leads to a 10% increase in quantity supplied. Supply
  • 33. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (c) Unit Elastic Supply: Elasticity Equals 1 Quantity 0 Price 125 $5 100 4 2. . . . leads to a 22% increase in quantity supplied. 1. A 22% increase in price . . . Supply
  • 34. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (d) Elastic Supply: Elasticity Is Greater Than 1 Quantity 0 Price 1. A 22% increase in price . . . 2. . . . leads to a 67% increase in quantity supplied. 4 100 $5 200 Supply
  • 35. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (e) Perfectly Elastic Supply: Elasticity Equals Infinity Quantity 0 Price $4 Supply 3. At a price below $4, quantity supplied is zero. 2. At exactly $4, producers will supply any quantity. 1. At any price above $4, quantity supplied is infinite.
  • 36.
  • 37.
  • 38.
  • 39.
  • 40. Figure 8 An Increase in Supply in the Market for Wheat Copyright©2003 Southwestern/Thomson Learning Quantity of Wheat 0 Price of Wheat 3. . . . and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220. Demand S 1 S 2 2. . . . leads to a large fall in price . . . 1. When demand is inelastic, an increase in supply . . . 2 110 $3 100
  • 41. Compute the Price Elasticity of Supply Supply is inelastic
  • 42.
  • 43.
  • 44.