hubbard01_instructorppt06.ppt

Elasticity:The Responsiveness ofDemand and Supply,2 of 29,After studying this chapter,you should be able to:Define the price elasticity of demand and understand how to calculate it.Discuss the determinants of the price elasticity of demand.Understand the relationship between the price elasticity of demand and total revenue.Define the cross-price elasticity of demand and the income elasticity of demand,and understand how they are calculated and what their main determinants are.Use price elasticity and income elasticity to analyze economic issues.Define the price elasticity of supply,and understand how it is calculated and what its main determinants are.,Do People Care about the Prices of Books?,LEARNING OBJECTIVES,In this chapter we will see how to measure the responsiveness of the quantity demanded of a product to changes in its price.,3 of 29,Elasticity:The Responsiveness of Demand and Supply,Elasticity A measure of how much one economic variable responds to changes in another economic variable.,4 of 29,The Price Elasticity of Demand and Its Measurement,Price elasticity of demand The responsiveness of the quantity demanded to a change in price,measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the products price.Measuring the Price Elasticity of Demand,5 of 29,The Price Elasticity of Demand and Its Measurement,Elastic Demand and Inelastic DemandElastic demand Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price,so the price elasticity is greater than 1 in absolute value.Inelastic demand Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price,so the price elasticity is less than 1 in absolute value.Unit-elastic demand Demand is unit-elastic when the percentage change in quantity demanded is equal to the percentage change in price,so the price elasticity is equal to 1.,6 of 29,The Price Elasticity of Demand and Its Measurement,An Example of Computing Price Elasticities,6-1,7 of 29,The Price Elasticity of Demand and Its Measurement,The Midpoint Formula,Price elasticity of demand=,8 of 29,Calculating the Price Elasticity of Demand for Wheat Using the Midpoint Formula,6-1,Verify that the price elasticity of demand is 0.4.,9 of 29,The Price Elasticity of Demand and Its Measurement,Polar Cases of Perfectly Elastic and Perfectly Inelastic DemandPerfectly inelastic demand Demand is perfectly inelastic when a change in price results in no change in quantity demanded.Perfectly elastic demand Demand is perfectly elastic when a change in price results in an infinite change in quantity demanded.,10 of 29,The Price Elasticity of Demand and Its Measurement,6 1,11 of 29,The Price Elasticity of Demand and Its Measurement,6 1(continued),Dont Confuse Inelastic with Perfectly Inelastic,12 of 29,What Determines the Price Elasticity of Demand for a Product?,The key determinants of price elasticity of demand are as follows:Availability of close substitutesPassage of timeNecessities versus luxuriesDefinition of the marketShare of good in the consumers budget,13 of 29,The Price Elasticity of Demand for Breakfast Cereal,6-1,What happens when the price of cereal rises?,14 of 29,The Relationship Between Price Elasticity and Total Revenue,Total revenue The total amount of funds received by a seller of a good or service,calculated by multiplying price per unit by the number of units sold.,6-2,15 of 29,The Relationship Between Price Elasticity and Total Revenue,Elasticity and Revenue with a Linear Demand Curve,6 2,16 of 29,The Relationship Between Price Elasticity and Total Revenue,6-3,17 of 29,Determining the Price Elasticity of Demand for DVDs by Market Experiment,6-2,When DVDs were first introduced,the movie studios were uncertain of their price elasticity of demand.,18 of 29,Other Demand Elasticities,Cross-Price Elasticity of DemandCross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another good.,6 3,19 of 29,Other Demand Elasticities,Income Elasticity of DemandIncome elasticity of demand A measure of the responsiveness of quantity demanded to changes in income,measured by the percentage change in quantity demanded divided by the percentage change in price.,6 4,20 of 29,Price Elasticity,Cross-Price Elasticity,and Income Elasticity in the Market for Alcoholic Beverages,6-3,An“Inferior Good?”,21 of 29,Using Elasticity to Analyze the Disappearing Family Farm,6-4,22 of 29,Using Price Elasticity to Analyze the Drug Problem,6-3,Verify that the percentage change in quantity demanded is 1.9%.,23 of 29,The Price Elasticity of Supply,Measuring the Price Elasticity of SupplyPrice elasticity of supply The responsiveness of the quantity supplied to a change in price,measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the products price.,24 of 29,Why Are Oil Prices So Unstable?,6-4,Why do oil prices fluctuate so much?,25 of 29,The Price Elasticity of Supply,6 5,Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply,26 of 29,The Price Elasticity of Supply,Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply,27 of 29,The Price Elasticity of Supply,Using Price Elasticity of Supply to Predict Changes in Price,6-5,28 of 29,Amazon,Microsoft Earnings Better than Expected,29 of 29,Consumers Change Their Behavior in Response to the Gas Prices,Politics Failed,but Fuel Prices Cut Congestion,AN INSIDE LOOK,The demand for gasoline becomes more elastic over time.,30 of 29,Cross-price elasticity of demandElastic demandElasticityIncome elasticity of demandInelastic demandPerfectly elastic demand,Perfectly inelastic demandPrice elasticity of demandPrice elasticity of supplyTotal revenueUnit-elastic demand,