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**Chapter 7 Elasticity of Demand and Supply**

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**Demand Elasticity (Price Elasticity of Demand)**

Ed = (%∆Qd)/(%∆P) = {(Qd2 - Qd1)/[(Qd1 + Qd2)/2]}/ {(P2 – P1)/[(P1 + P2)/2]} Ed represented as positive by convention, though actually always negative due to downward-sloping demand curve hence always take absolute value

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Chapter 20 Figure 20.1(a)

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Chapter 20 Figure 20.1(b)

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Chapter 20 Table 20.1

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Chapter 20 Figure 20.2(a)

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**Determinants of Price Elasticity of Demand**

Demand tends to be more elastic or less inelastic: if the good is a luxury; the longer the time period; the greater the number of close substitutes; and the more narrowly defined the market. 8

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**Determinants of Price Elasticity of Demand**

Demand tends to be more inelastic or less elastic: if the good is a necessity; the shorter the adjustment time; if there are few good substitutes; and the more broadly defined the market. 9

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**Total Revenue and Elasticity**

Chapter 20 Figure 20.2(b) Total Revenue and Elasticity

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Chapter 20 Table 20.2

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**Computing Demand Elasticity**

Demand for Ice Cream ED = (8 - 10) / 9 2.20 ($ $2.00) / $2.10 2.00 8 10 11

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**Computing Demand Elasticity**

Demand for Ice Cream ED = (22%) 2.20 (9.5%) 2.00 8 10 12

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**Computing Demand Elasticity**

Demand for Ice Cream ED 2.32 = 2.20 2.00 8 10 13

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**Computing Demand Elasticity**

Demand for Ice Cream Demand is Elastic ED 2.32 = 2.20 2.00 8 10 14

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Chapter 20 Table 20.3

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**Supply Elasticity (Price Elasticity of Supply)**

Es = (%∆Qs)/(%∆P) = {(Qs2 - Qs1)/[(Qs1 + Qs2)/2]}/ {(P2 – P1)/[(P1 + P2)/2]} Es always positive due to upward-sloping demand curve hence never take absolute value

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Chapter 20 Figure 20.3(a)

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Chapter 20 Figure 20.3(b)

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Chapter 20 Figure 20.3(c)

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**Cross Elasticities (Cross-Price Elasticity of Demand)**

Exy = (%∆Qdx)/(%∆Py) = {(Qdx2 - Qdx1)/[(Qdx1 + Qdx2)/2]}/ {(Py2 – Py1)/[(Py1 + Py2)/2]} Exy measures responsiveness of the demand for x to changes in the price of y Positive for substitutes Negative for complements never take absolute value

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**Income Elasticities (Income Elasticity of Demand)**

Ei = (%∆Qd)/(%∆Y) = {(Qd2 - Qd1)/[(Qd1 + Qd2)/2]}/ {(Y2 – Y1)/[(Y1 + Y2)/2]} Ei measures responsiveness of demand for x to changes in (average) consumer income Positive for normal goods Negative for inferior goods never take absolute value

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Chapter 20 Table 20.4

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Elasticity and Its Application

Elasticity and Its Application

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