Chapter 6: Demand and Supply elasticity

Learning OBJ 6.1

Calculate price elasticity of demand

Learning OBJ 6.2

Explain the relationship between price elasticity of demand and total revenues

Learning OBJ 6.3

Describe the factors that determine the price elasticity of demand

Learning OBJ 6.4

Explain the cross price elasticity of demand and the income elasticity of demand

Learning OBJ 6.5

Classify supply elasticities and explain how the length of time for adjustment affects the price elasticity of supply

Calculating elasticity

Price of elasticity of demand formula:

Q1-Q2 /            /   P1 - P2*******************

—----------       /    —----------

(Q1+Q2)/2    /      (P1+P2) /2

what are we calculating?

6.1

Price elasticity of demand (E_p)****************

-The responsiveness of quantity demanded of a commodity to changes in its price

-Defined as the % change in quantity demanded / by the % change in price

6.1

Determinants of Price elasticity of demand***********

-The existence and number of substitutes

-The share of a consumer’s total budget devoted to purchases of that commodity

-The length of time allowed for adjustment to changes in the $ of the commodity

6.1
Price elasticity of demand (E_p)****************

6.1

EX :Price of oil ⬆ 10 %, Quantity demanded ⬇ 2 %

How would you write that?

6.1

Hong Kong government temporarily eliminated all subsidies offered to purchasers of Tesla’s electric vehicles.

As a consequence, Tesla vehicles ↑ from about $75,000 to $130,000, and the quantity of Tesla vehicles demanded ↓ from 500 per month to about 30.

Assuming other things =, what is the price elasticity of demand?

The price elasticity of 3.3 means that a 1% ↑ in price generated a 3.3% ⬇ in the quantity of Tesla vehicles purchased

6.1

Elastic demand

-The % change in quantity demanded is larger than the % change in price.

-Total expenditures and price are inversely related in the elastic region of the demand curve.

-Upon calculation, a number greater than 1 indicates an elastic demand.

-E_p > 1

6.1

Unit elasticity of demand

-The % change in quantity demanded is equal to the % change in price.

-Total expenditures are invariant to price changes in the unit-elastic region of the demand curve.

-Upon calculation, a # =’s to 1 indicates a unit-elastic demand.

-E_p = 1

6.1

Inelastic demand

-The % change in quantity demanded is smaller than the % change in price.

-Total expenditures and price are directly related in the inelastic region of the demand curve.

-Upon calculation, a number less than 1 indicates an inelastic demand.

-E_p < 1

6.1

Know for exam

Elastic demand:

% change in Q > % change in P; E_p > 1

Unit-elastic demand:

% change in Q = % change in P; E_p = 1

Inelastic demand:

% change in Q < % change in P; E_p < 1

6.1

Perfectly inelastic demand

-The demand curve is a vertical line.

-It has only 1 quantity demanded for each price.

-No matter what the price, the quantity demanded does not change.

-The demand exhibits 0 responsiveness to price changes.

6.1

Perfectly elastic demand

-The demand curve is a horizontal line.

-It has only 1 price for every quantity.

-The slightest ↑ in price leads to 0 quantity demanded.

When demand is elastic, a relationship exists between changes in price and changes in total revenues.

When demand is unit-elastic, changes in price do not change total revenues.

When demand is inelastic, a + relationship exists between changes in price and total revenues.

6.3

Existence of substitutes***

-The closer the substitutes and the more substitutes there are, the more elastic the demand.

Share of the budget:

-The greater the share of the consumer’s total budget spent on a good, the greater the price elasticity.

The length of time allowed for adjustment:

-The longer any price change persists, the greater the elasticity of demand, other things held constant.

-Elasticity of demand is greater in the long run than in the short run

6.3

How to define the short run and the long run

-Short run is a time period too short for consumers to fully adjust to a price change.

-Long run is a time period long enough for consumers to fully adjust to a change in price, other things being constant.

6.4

Cross price elasticity of demand (E_xy)*************

-The % change in the demand for 1 good (holding its price constant) ➗ by the % change in the price of a related good

6.4

What is the formula for computing cross price elasticity of demand between good X and good Y:

6.4

Income elasticity of demand (E_i)

-The % change in demand for any good, holding its price constant, ፥ by the % change in income

-The responsiveness of demand to changes in income, holding the good’s relative price constant

Formula for computing income elasticity of demand:

6.5

Price elasticity of supply (E_s)*********

-The responsiveness of the quantity supplied of a commodity to a change in its price

-The % change in quantity supplied divided by the % change in price

Formula for computing price elasticity of supply

6.5

Perfectly elastic supply

-Quantity supplied falls to 0 when there is the slightest ↓ in price.

-The supply curve is horizontal at a given price.