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KRUGMAN'S MICROECONOMICS for AP* Interpreting Price Elasticity of Demand Margaret Ray and David Anderson Micro: Econ: 11 47 Module.

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Presentation on theme: "KRUGMAN'S MICROECONOMICS for AP* Interpreting Price Elasticity of Demand Margaret Ray and David Anderson Micro: Econ: 11 47 Module."— Presentation transcript:

1 KRUGMAN'S MICROECONOMICS for AP* Interpreting Price Elasticity of Demand Margaret Ray and David Anderson Micro: Econ: Module

2 What you will learn in this Module :

3 The difference between elastic and inelastic demand The relationship between elasticity and total revenue Changes in the price elasticity of demand along a demand curve The factors that determine price elasticity of demand

4 Interpreting Price Elasticity of Demand What does the value of elasticity tell us?

5 Elasticity and the Demand Curve Elasticity and the demand curve

6 Elasticity and Total Revenue Total Revenue and Elasticity TR = P x Q Price effect (Price ↑ Revenue ↑) Quantity effect (Price ↑ Revenue ↓)

7 Elasticity and Total Revenue Example 1: Suppose P increases 1%, Q d decreases 5%, a very elastic response. TR will fall, because the downward quantity effect is stronger than the upward price effect.

8 Elasticity and Total Revenue Example 2: Suppose P increases 10%, Q d decreases 5%, an inelastic response. TR will rise, because the downward quantity effect is weaker than the upward price effect.

9 Elasticity and Total Revenue Example 3: Suppose P increases 10%, Q d decreases 10%, a unit elastic response. TR will not change, because the downward quantity effect is equal to the upward price effect.

10 ElElasticity along the Demand Curve Elasticity Along the Demand Curve

11 Determinants of Elasticity What Factors Determine the Price Elasticity of Demand? Number of substitutes Luxury or necessity? Share of income spent Time

12 Figure 47.2 (a) Unit-Elastic Demand, Inelastic Demand, and Elastic Demand Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

13 Figure 47.2 (b) Unit-Elastic Demand, Inelastic Demand, and Elastic Demand Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

14 Figure 47.2 (c) Unit-Elastic Demand, Inelastic Demand, and Elastic Demand Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

15 Figure 47.3 Total Revenue Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

16 Table 47.1 Price Elasticity of Demand and Total Revenue Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

17 Figure 47.4 The Price Elasticity of Demand Changes Along the Demand Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers


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