SAYRE | MORRIS Seventh Edition Elasticity CHAPTER 4 4-1© 2012 McGraw-Hill Ryerson Limited

Price Elasticity of Demand a measure of how much quantity demanded changes as a result of a change in price can be expanded to: 4-2© 2012 McGraw-Hill Ryerson Limited LO1

Price Elasticity of Demand Example: airline tickets 4-3© 2012 McGraw-Hill Ryerson Limited LO1 Vancouver to EdmontonVancouver to Calgary Price Quantity of TicketsTotal Revenue Price Quantity of TicketsTotal Revenue $ $ $ $

%Q D = (1100 – 1000) (( )/2) = 100 x 100% = 9.5% 1050 % P = (650 – 550) (( ) / 2) = 100 x 100% = 16.7% 600 E P = 9.5% / 16.7% = 0.57 © McGraw Hill Publishing Co,

Price Elasticity of Demand Elasticity Coefficient a number that measures the responsiveness of quantity demanded to a change in price 4-5© 2012 McGraw-Hill Ryerson Limited LO1 If coefficient is:Demand is: Greater than 1Elastic Less than 1Inelastic Equal to 1Unitary

Price Elasticity of Demand Inelastic Demand quantity demanded that is not very responsive to a change in price Elastic Demand quantity demanded that is quite responsive to a change in price 4-6© 2012 McGraw-Hill Ryerson Limited LO1

Price Elasticity of Demand Unitary Demand the point where the percentage change in quantity is exactly equal to the percentage change in price 4-7© 2012 McGraw-Hill Ryerson Limited LO1

Elasticity and Total Revenue 4-8© 2012 McGraw-Hill Ryerson Limited LO1 If demand is elastic, an increase in price will decrease revenue If demand is inelastic, an increase in price will increase revenue Vancouver to EdmontonVancouver to Calgary PriceQuantityTotal Revenue: CPriceQuantityTotal Revenue: D $ $ $ $ inelastic elastic

Vancouver to Edmonton Elasticity = 100/950 = = (Inelastic) 100/ TR1= 650 x 1000 = 650,000 TR2 = 750 x 900 = 675,000 Vancouver to Calgary Elasticity = 250/875 = = 2 (Elastic) 100/ TR1 = 650 x 1000 = 650,000 TR2 = 750 x 750 = 562,500 © McGraw Hill Publishing Co,

Elasticity and Total Revenue If Demand is:and Price … then Total Revenue … inelastic (<1)falls inelastic (<1)rises elastic (>1)fallsrises elastic (>1)risesfalls unitary elastic (=1)fallsstays the same unitary elastic (=1)risesstays the same 4-10© 2012 McGraw-Hill Ryerson Limited LO1

Elasticity and Slope 4-11© 2012 McGraw-Hill Ryerson Limited LO2 Slope Rise over run Elasticity Percentage change in quantity over percentage change in price

Run Rise P Q The slope of a straight line remains the same along each point on the curve. Elasticity does not remain constant. Dealing with % change has everything to do with the values we are using. © McGraw Hill Publishing Co,

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© McGraw Hill Publishing Col,

Determinants of Elasticity Examples of elastic and inelastic demands: 4-15© 2012 McGraw-Hill Ryerson Limited LO3 Commodities That Have Elastic Demands Commodities That Have Inelastic Demands fresh tomatoes (4.60)household electricity (0.13) movies (3.41)eggs (0.32) lamb (2.65)car repairs (0.36) restaurant meals (1.63)food (0.58) china and tableware (1.54)household appliances (0.63) automobiles (1.14)tobacco (0.86) Source: H.S. Houthakker and Lester D. Taylor, Consumer Demand in the United States (Cambridge, MA: Harvard University Press, 1970).

Determinants of Price Elasticity The demand for a product is more elastic: the closer and the greater are the number of available substitutes; the larger the percentage of one’s income that is spent on the product; and the longer the time period involved. 4-16© 2012 McGraw-Hill Ryerson Limited LO3