Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Elasticity... … is a measure of how much buyers and sellers respond to changes in market conditions... … allows us to analyze supply and demand with greater precision.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Elasticity: A General Definition: The percentage (%) change in something given a one percent (1%) change in something else.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Price Elasticity of Demand The percentage change in the quantity demanded given a one percent change in the price. A B Demand P Q

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Ranges of Elasticity... u Perfectly Inelastic Consumers are “completely unresponsive” to price changes. u Perfectly Elastic Consumers are “extremely responsive” to price changes. u Unit Elastic Response is “equal to” change in price.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Elasticity of Demand Illustrated Perfectly Inelastic P2P2 P1P1 Even if price increases a lot quantity demanded stays the same.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Elasticity of Demand Illustrated Perfectly Elastic P1P1 A small increase in price will cause demand to drop off completely.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Computing Elasticity Coefficient u Computed as the percentage change in the quantity demanded divided by the percentage change in price. Price Elasticity of Demand = Percentage Change in Quantity Demanded Percentage Change in Price

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Computing Elasticity Coefficient Demand for Ice Cream EDED ($ $2.00) / $2.00 (8 - 10) / 10 =

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Elasticity and Total Revenue E D > 1 then P QTR and

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Elasticity and Total Revenue E D < 1 then P QTR and

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Income Elasticity of Demand The percentage change in the quantity demanded given a one percent change in income.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Computing Income Elasticity u Computed as the percentage change in demand divided by the percentage change in Income. Income Elasticity of Demand = Percentage Change in Demand Percentage Change in Income

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Income Elasticity... Types Y D > 0 Normal Goods Y D < 0 Inferior Goods Y D = 0 Income-neutral Goods

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Price Elasticity of Supply The percentage change in quantity supplied resulting from a one (1) percent change in price. Price Quantity A B

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Determinants of Elasticity of Supply u Flexibility or ability of sellers to change the amount of the good they produce. – Beachfront land vs. books, cars, manufactured goods, etc. – More elastic in the long run.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Computing Elasticity Coefficient u Computed as the percentage change in the quantity supplied divided by the percentage change in price. Elasticity of Supply = Percentage Change in Quantity Supplied Percentage Change in Price

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Applications of Elasticity “Can Good News for Farming Be Bad News For Farmers?” What happens to wheat farmers and the market for wheat when university agronomists discover a new wheat hybrid that is more productive than existing varieties?

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Apply Comparative Statics À Examine whether the supply or demand curve shifts. Á Consider the direction the curve shifts. Â Use supply-and-demand diagrams to see how the market equilibrium changes. Consider the state of elasticity.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Consider which direction the curve shifts. SASA DADA Price Quantity $ SBSB Technology causes an increase in supply.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Compute Elasticity E D = ( ) / (2000) ($ $4.00) / ($4.00) E D = 0.57 (Inelastic)

Principles of Microeconomics & Principles of Macroeconomics: Ch. 5 First Canadian Edition Observe the Change in Total Revenue SASA DADA Price Quantity $ SBSB 2400 $2.60 TR SA = $8,000 TR SB = $5,760!