Price Elasticity of Demand and Supply: A Comprehensive Guide, Slides of Microeconomics

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Elasticity and its ApplicationElasticity and its Application

In this chapter, look for the answers to

these questions:

 What is elasticity? What kinds of issues can

elasticity help us understand?

 What is the price elasticity of demand?

How is it related to the demand curve? How is it related to revenue & expenditure?

 What is the price elasticity of supply?

How is it related to the supply curve?

 What are the income and cross-price elasticities of

demand?

Elasticity (hệ số co giãn)  (^) Basic idea: Elasticity measures how much

one variable responds to changes in another

variable.

• One type of elasticity measures how much demand for your websites will fall if you raise your price.  (^) Definition:

Elasticity is a numerical measure of the

responsiveness of Qd^ or Qs^ to one of its

determinants.

Price Elasticity of Demand  (^) Price elasticity of demand measures how

much Qd^ responds to a change in P.

Price elasticity of demand = Percentage change in Q d Percentage change in P  (^) Loosely speaking, it measures the price-

sensitivity of buyers’ demand.

Price Elasticity of Demand Along a D curve, P and Q move in opposite directions, which would make price elasticity negative. We will drop the minus sign and report all price elasticities as positive numbers. Along a D curve, P and Q move in opposite directions, which would make price elasticity negative. We will drop the minus sign and report all price elasticities as positive numbers. P Q D Q 2 P 2 P 1 Q 1 Price elasticity of demand = Percentage change in Q d Percentage change in P

Calculating Percentage Changes P Q D $ 8 B $ 12 A Demand for your websites Standard method of computing the percentage (%) change: end value – start value start value x 100% Going from A to B, the % change in P equals ($250–$200)/$200 = 25%

Calculating Percentage Changes

 So, we instead use the midpoint method :

end value – start value

midpoint

x 100%

 The midpoint is the number halfway between

the start & end values, also the average of those values.

 It doesn’t matter which value you use as the

“start” and which as the “end” – you get the same answer either way!

Calculating Percentage Changes

 Using the midpoint method, the % change

in P equals

x 100% = 22.2%

 The % change in Q equals

x 100% = 40.0%

 The price elasticity of demand equals

AA CC TT II VV EE LL EE AA RR NN II NN GG 11 :: Answers Answers

Use midpoint method to calculate

% change in Q d

% change in P

The price elasticity of demand equals

13

What determines price elasticity?

To learn the determinants of price elasticity,

we look at a series of examples.

Each compares two common goods.

In each example:

• Suppose the prices of both goods rise by 20%.
• The good for which^ Q d (^) falls the most (in percent) has the highest price elasticity of demand. Which good is it? Why?
• What lesson does the example teach us about the determinants of the price elasticity of demand?

EXAMPLE 2:

“Blue Jeans” vs. “Clothing”

 The prices of both goods rise by 20%.

For which good does Q d^ drop the most? Why?

• For a narrowly defined good such as blue jeans, there are many substitutes (khakis, shorts, Speedos).
• There are fewer substitutes available for broadly defined goods. (Can you think of a substitute for clothing, other than living in a nudist colony?)

 Lesson: Price elasticity is higher for narrowly

defined goods than broadly defined ones.

EXAMPLE 3:

Insulin vs. Caribbean Cruises

 The prices of both of these goods rise by 20%.

For which good does Q d^ drop the most? Why?

• To millions of diabetics, insulin is a necessity. A rise in its price would cause little or no decrease in demand.
• A cruise is a luxury. If the price rises, some people will forego it.

 Lesson: Price elasticity is higher for luxuries

than for necessities.

The Determinants of Price Elasticity: A Summary The price elasticity of demand depends on:  (^) the extent to which close substitutes are available ( hàng hóa thay thế gần )  (^) whether the good is a necessity or a luxury ( thiết yếu vs xa xỉ )  (^) how broadly or narrowly the good is defined  (^) the time horizon: elasticity is higher in the long run than the short run. The price elasticity of demand depends on:  (^) the extent to which close substitutes are available ( hàng hóa thay thế gần )  (^) whether the good is a necessity or a luxury ( thiết yếu vs xa xỉ )  (^) how broadly or narrowly the good is defined  (^) the time horizon: elasticity is higher in the long run than the short run.

The Variety of Demand Curves

 Economists classify demand curves according to

their elasticity.

 The price elasticity of demand is closely related to

the slope of the demand curve.

 Rule of thumb:

The flatter (thoải) the curve, the bigger the elasticity. The steeper (dốc) the curve, the smaller the elasticity.

 The next 5 slides present the different classifications,

from least to most elastic.