Lec 7-8 elasticity.ppt
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Transcript of Lec 7-8 elasticity.ppt
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8/20/2019 Lec 7-8 elasticity.ppt
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SUPPLY AND DEMAND:
ELASTICITY ANDAPPLICATION
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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(
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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
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ELASTICITY
T%o )asi! T,pes:
• Pri!e elasi!i, of &e'an&
• Pri!e elasi!i, of s+ppl,
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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!
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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!
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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
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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
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Price
Quantity Demanded (000s)
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
Quantity Demanded (000s)
£5
00
T"ta$ -e%enue
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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
Quantity Demanded (000s)
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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
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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)
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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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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