Lec 7-8 elasticity.ppt

8/20/2019 Lec 7-8 elasticity.ppt

1/14

SUPPLY AND DEMAND:

ELASTICITY ANDAPPLICATION


2/14

2

ELASTICITY – THE CONCEPT

• The responsiveness of onevariable o !han"es in anoher

• #hen pri!e rises$ %hahappenso &e'an&(

• De'an& falls• )UT*

• Ho% '+!h &oes &e'an& fall(


3/14

3

ELASTICITY – THE CONCEPT

• If pri!e rises b, -./ 0 %hahappens o &e'an&(

• #e 1no% &e'an& %ill fall• ), 'ore han -./(

• ), less han -./(

• Elasi!i, 'eas+res he e2eno %hi!h &e'an& %ill !han"e


4/14

4

ELASTICITY

T%o )asi! T,pes:

• Pri!e elasi!i, of &e'an&

• Pri!e elasi!i, of s+ppl,


5/14

5

ELASTICITY

• Pri!e Elasi!i, of De'an&–The responsiveness of &e'an&

o !han"es in pri!e–#here / !han"e in &e'an&

is "reaer han / !han"e in pri!e– elasi!

–#here / !han"e in &e'an& isless han / !han"e in pri!e 0inelasi!


6/14

6

ELASTICITY

The 3or'+la:

Pe& 4/ Chan"e in 5+ani, De'an&e& ___________________________

/ Chan"e in Pri!e

If ans%er is be%een . an& 0-: he relaionship is inelasi!

If ans%er is be%een 0- 6 infini,: he relaionship is elasi!


7/14

7

ELASTICITY

Price (£)

Quantity Demanded

The &e'an& !+rve !an be aran"e of shapes ea!h of%hi!h is asso!iae& %ih a&ifferen relaionshipbe%een pri!e an& he7+ani, &e'an&e&8


8/14

8

ELASTICITY

Price

Quantity Demanded (000s)

D

Te im!"rtance "# e$asticityis te in#"rmati"n it!r"%ides "n te e##ect "nt"ta$ re%enue "# can&es in!rice'

£5

00

T"ta$ re%enue is !rice *uantity s"$d' +n tiseam!$e, T- . £5 00,000. £500,000'

Tis %a$ue is re!resented /yte &rey saded rectan&$e'

T"ta$ -e%enue


9/14

Price


D

+# te #irm decides t"decrease !rice t" (say) £3,te de&ree "# !rice e$asticity"# te demand cur%e 1"u$ddetermine te etent "# teincrease in demand and tecan&e tere#"re in t"ta$

re%enue'£5

00

£3

40

T"ta$ -e%enue

ELASTICITY

Price


£5

00

T"ta$ -e%enue


10/14

0

Price (£)

0

D

5

5

6

Price . 50

Quantity Demanded . 20

Ped . 0'4 (+ne$astic)

T"ta$ -e%enue 1"u$d #a$$

Pr"ducer decides t" $"1er !rice t" attract sa$es

"t a &""d m"%e

ELASTICITY



11/14

ELASTICITY

Price (£)

Quantity Demanded

D

0

5 20

Pr"ducer decides t" reduce !rice t" increase sa$es

7

in Price . 30

in Demand . 300

Ped . 0 ($astic)T"ta$ -e%enue rises

9""d :"%e


12/14

2

ELASTICITY

• If &e'an& ispri!e elasi!:

• +ncreasin& !rice1"u$d re&+!e T-( Qd ; P)

• -educin& !rice

1"u$d in!rease T-

( Qd ; P)

• If &e'an& ispri!e inelasi!:

• +ncreasin& !rice1"u$d in!rease T-

( Qd < P)

• -educin& !rice1"u$d re&+!e T-( Qd < P)


13/14

3

P9ICE ELASTICITY O3 SUPPLY

• Pri!e Elasi!i, of S+ppl,:

– The responsiveness of s+ppl, o!han"es in pri!e

– If Pes is inelasi! 0 i %ill be &iffi!+lfor s+ppliers o rea! s%ifl, o!han"es in pri!e

– If Pes is elasi! – s+ppl, !an rea!

7+i!1l, o !han"es in pri!e

Pes 4/ 5+ani, S+pplie& ;;;;;;;;;;;;;;;;;;;;

/ Pri!e


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4

APPLICATION O3 THECONCEPT O3 ELASTICITY

• 9elaionship be%een !han"esin pri!e an& oal reven+e – De!ision'a1in" in raisin" or lo%erin" he pri!e8

• Deer'inin" %ha "oo&s o a2 in or&ero "enerae 'a2i'+' reven+e

• I'poran!e in anal,sin" i'e la"sbe%een pro&+!ion an& sale

• E2plains he behavio+r of a fir' in !aseof sale of "oo&s %ih &ifferen elasi!i,8

Documents

Lec 7-8 elasticity.ppt