Percentage Change Demand increases from 80 to 100. % increase = = 0.25 = 25% Demand decreases from 100 to 80. % decrease = = 0.20 = 20% 5 Elasticity

Price Elasticity of Demand Pounds of Coffee (M) Price per pound ($) % increase in price % decrease in quantity

Price elasticity of demand % change in quantity demanded % change in price = Elastic (elasticity>1.0)very responsive “a measure of responsiveness” Inelastic (elasticity<1.0)not very responsive

Pounds of Coffee (M) Price per pound ($) Perfectly inelastic price has no effect Perfectly elastic only one price will do

Determinants of Price Elasticity

Using the Price Elasticity of Demand Price elasticity of demand % change in quantity demanded % change in price = % change in quantity Price elasticity of demand % change in price=X What impact increasing egg prices from $1.20 to $1.35? =X

Changes in Total Revenue If 50,000 dozen eggs are sold at $1.20, what impact on revenue of increasing price to $1.35? Decrease in eggs sold = 50,000 x 1.25% = 625 Old revenue = 50,000 x $1.20 = $60,000 New revenue = 49,375 x $1.35 = $66,656 Elasticprice increase will decrease revenue Inelasticprice increase will increase revenue

Other Elasticities of Demand Income elasticity of demand % change in quantity demanded % change in income = Cross elasticity of demand % change in X demanded % change in price of Y = Substitutescross elasticity is positive Complementsprice elasticity is negative

Price Elasticity of Supply Price elasticity of supply % change in quantity supplied % change in price = Determinants of Price Elasticity of Supply

Who Bears the Burden? Quantity Price $10 The Incidence of an Excise Tax When a tax is imposed on suppliers, consumers pay more. And suppliers receive less.

Quantity Price $10 Inelastic demand (quantity not affected much by price.) and only a small portion by producers. Most of the tax is born by consumers…

Quantity Price $10 Elastic demand (quantity highly affected by price.) … and a large portion paid by suppliers. Tax results in a small price increase…

Quantity Price $10 Perfectly Elastic Supply (horizontal supply curve) Price increases as much as the tax.