1. Elasticities Chapter 4: Introduction to Elasticities

2. An Elasticity measures of one economic variable to changes in another economic variable the responsiveness Price Quantity Demanded

3. For example, How responsive is quantity supplied to changes in the price of a good? How responsive is quantity demanded to changes in the price of a good?

4. Any Elasticity is a Pure number... That is, Elasticities have no units such as $, lbs. or bushels 3 - 1.2 - 0.06 0.05 4.6

5. Any elasticity is a ratio of two percentage changes in two different economic variables Percent change in quantity demanded Percent change in price

6. For example, Suppose the two economic variables are Quantity Demanded (Qd) and Price (P)

7. The Elasticity of Demand is defined as The percentage change in divided by the percentage change in Price Quantity Demanded

8. or as % Qd % P where denotes change Greek Delta

9. An elasticity of demand is not the slope of the demand curve but is linked to the slope Price Quantity/ unit of time D

10. For most (but not all!) demand curves the elasticity of demand varies as you move along the demand curve Price Quantity/ unit of time D

11. Demand O C Price Quantity Demanded/ unit of time

12. Demand O B C Price Quantity Demanded/ unit of time

13. Demand Point of Unit Elasticity (-1) O B C Price Quantity Demanded/ unit of time

14. Demand Elastic Portion Inelastic Portion Point of Unit Elasticity (-1) O B C OB=BC the Ed = -1 Price Quantity Demanded/ unit of time

15. Demand Elastic Portion Inelastic Portion Point of Unit Elasticity (-1) O B C OB=BC the Ed = -1 Price Quantity Demanded/ unit of time BC < OB then demand is inelastic

16. Demand Elastic Portion Inelastic Portion Point of Unit Elasticity (-1) O B C OB=BC the Ed = -1 Price Quantity Demanded/ unit of time BC < OB then demand is inelastic BC > OB then demand is elastic

17. Demand elasticities are negative because price and quantity demanded move in opposite directions. Price up; Quantity Demanded down. Elastic demand: a number more negative than -1 - 2, -3, -6.5 Inelastic demand: A number between 0 and -1 - 0.2, -0.3, -0.73 Unitary elasticity of demand: exactly -1

18. A Curve with Unitary Elasticity Everywhere - 1 elasticity of demand everywhere

19. Price Quantity demanded per unit of time

20. Price Quantity demanded per unit of time A O C B BC = OB Elasticity of demand = -1

21. Price Quantity demanded per unit of time A O C B BC = OB Elasticity of demand = -1 at point A

22. Calculating Demand Elasticities

23. Suppose that Price INCREASES from $6 to $8 and Quantity Demanded DECREASES from 12 units to 8 units % in Qd % in Price 8 - 12 $8 - $6 $7 10 = 7 x - 4 10 x 2 = -28/20 = -1.4 = Ed = Elastic!

24. Two Demand Curves D1 D2 Price Quantity demanded / unit of time

25. D2 is more ELASTIC than D1 Qd is more responsive to Price change for D2 than D1 But, certain points on D2 are less elastic than certain points on D1 This is because elasticities change as you move along the demand curve

26. Other Elasticities Price Elasticity of Supply E s = % in Q s % in P Usually Positive

27. Income Elasticity of Demand E i = % in Q d % in Income Occasionally negative Income Elasticity of Demand for hamburger

28. Links Income and Quantity Demanded Income Food Clothing Income Engel Curve