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Elasticity

The document discusses key economic concepts such as price floors, price ceilings, deadweight loss, and elasticity of demand. It explains the differences between elastic and inelastic demand, how to calculate elasticity using various methods, and the implications of these concepts on total revenue. Additionally, it includes practice questions and examples related to elasticity and supply schedules.

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6 views

Elasticity

The document discusses key economic concepts such as price floors, price ceilings, deadweight loss, and elasticity of demand. It explains the differences between elastic and inelastic demand, how to calculate elasticity using various methods, and the implications of these concepts on total revenue. Additionally, it includes practice questions and examples related to elasticity and supply schedules.

Uploaded by

sidagrawal07
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 30

Number off 1-4

1. Give feedback on your group’s responses


(refer to notes, if needed!)

2. Price Floor: Purpose, where must it go to be


effective?
3. Price Ceiling: Purpose, where must it go to
be effective?
4. Deadweight Loss: Draw this and show
where it is on a graph!
Turn in your Module 6 & 7 MC questions

Elasticity notes on your own paper!


What happens to the quantity of gasoline
demanded when the price rises?
It will decrease.
But by how much? Will gas stations go out of
business? Will consumers stop driving to
school, work, and the mall?
Elasticity
Elasticity is a measure of responsiveness
Elasticity of Demand = Sensitivity to Price
i.e. how much will quantity demanded change,
as a result of a given change in price.
Elastic Demand
In Elastic Demand, quantity
demanded IS sensitive to price.
A relatively small price
increase results in a relatively
major change in quantity
demanded.
Example: a price of a good
changes from $1 to $1.10 (small
increase) results in large
numbers of people not buying
product
Elastic Demand
Inelastic Demand
In Inelastic Demand, quantity demanded IS
NOT sensitive to price.
A relatively large price increase results in a
relatively minor change in quantity
demanded.
Example: a price of a good changes from $1 to
$5 (large increase); yet most people still buy
the product.
INelastic = Quantity is
INsensitive to a change in price.
Inelastic Demand
Characteristics
Elastic Goods Inelastic Goods
Luxuries Necessities
Relatively expensive Relatively cheap
Substitutes No substitutes
available
Elastic or Inelastic?
Salt?
New Cars?
Toilet paper?
Pork Chops?
Insulin?
How can we calculate Elasticity?
Total revenue test
Percentage change test
Midpoint formula
Total Revenue
The total value of sales of a good or service
TR = Price x Quantity Sold
Total Revenue Test
Uses elasticity to show how changes in price will
affect total revenue (TR).
(TR = Price x Quantity)
Elastic Demand-
• Price increase causes TR to decrease
• Price decrease causes TR to increase
Inelastic Demand-
• Price increase causes TR to increase
• Price decrease causes TR to decrease
Unit Elastic-
• Price changes and TR remains unchanged

Ex: If demand for milk is INelastic, what will happen to


expenditures on milk if price increases?
Total Revenue Test
If…
If…
P TR
If...
OR
P TR
P TR
OR
Then demand is
ELASTIC P TR
Then demand is
INELASTIC
Demand Schedule and Total Revenue
Price
$10 Elastic
9 Unit-
8 elastic
7
6 Inelastic
5 Demand Schedule and Total Revenue
4 for a Linear Demand Curve
3
2 Price Quantity Total
1 demanded Revenue
D $0 10 $0
0 1 2 3 4 5 6 7 8 9 10 1 9 9
Quantity 2 8 16
3 7 21
Total 4 6 24
revenue 5 5 25
$25 6 4 24
24 7 3 21
21 8 2 16
16 9 1 9
10 0 0

9
The price elasticity of demand
0
0 1 2 3 4 5 6 7 8 9 10 changes along the demand curve
Quantity

Demand is Demand is
elastic: a inelastic: a higher
higher reduces
total revenue
price increase total
revenue p. 471 in text
Is the range between A and B, elastic,
inelastic, or unit elastic?
10 x 100 =$1000 Total Revenue
5 x 225 =$1125 Total Revenue
A Price decreased and TR
increased, so…
50% Demand is ELASTIC
B

125%
Finding the
Elasticity Coefficient

Price elasticity
of demand <1

Price elasticity
of demand > 1

Table 10.1 Some Estimated Price Elasticities of Demand


Krugman and Wells: Microeconomics, Second Edition in Modules
Copyright © 2012 by Worth Publishers
How Mad?
There are 5 steps in figuring out the
elasticity coefficient:
1. Write down the formula
2. Fill in the ORIGINAL numbers FIRST
3. Fill in the other two numbers
4. Take the absolute value (don’t use negative
#s)
5. Know the answer:
 ED > 1 … ELASTIC
 ED < 1 … INELASTIC
Ed = the percentage change in quantity demanded
divided by the percentage change in price.
Simplify this formula.
Ed = % in Qd
% in P
How do you figure out
Ed = % in Qd the numerator?
% in P How do you figure out
the denominator?
NUMERATOR
% in Qd = in Qd
always use
Qd
the original.
DENOMINATOR

% in P = in P
always use
P the original.
in Qd
Ed =
Qd in P

SIMPLIFY ONE LAST TIME:

in Qd P
Ed =
Qd in P
Midpoint Method
(Also called arc method)
Value of price elasticity will change
depending upon whether price is rising or
falling.
Midpoint method accounts for this, using
average price and average quantity between
two points on a demand curve.
Midpoint Formula
Q2 – Q1
(Q1 + Q2)/2
Price Elasticity of Demand=
P2 – P1
(P1 + P2)/2
True or False:
If the slope of a demand curve is constant,
then the elasticity of demand is constant as
well.
Practice FRQ
With your group
1. a. (i)
2. a. (ii)
3. a. (iii)
4. (b)
FRQ Practice
AP Microeconomics 2005 Scoring Guidelines (Form B)
3. The accompanying table gives part of the supply schedule for
personal computers in the United States.

a. Using the midpoint method, calculate the price elasticity of supply


when the price increases from $900 to $1,100.

b. Suppose firms produce 1,000 more computers at any given price due
to improved technology. As price increases from $900 to $1,100, is
the price elasticity of supply now greater than, less than, or the same
as it was in part a?
c. (refer to book for part c!)

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