1. Lectures in Microeconomics-Charles W. Upton Elasticity  “eta”

2. Elasticity Four demand functions P Q P PP Q QQ DD D D

3. Elasticity Four demand functions P Q P PP Q QQ DD D D

4. Elasticity Four demand functions P Q P PP Q QQ DD D D

5. Elasticity Four demand functions P Q P PP Q QQ DD D D

6. Elasticity The notion of elasticity The critical question: how responsive is the quantity demanded to changes in price?

7. Elasticity The notion of elasticity The critical question: how responsive is the quantity demanded to changes in price? And how do we measure that?

8. Elasticity A Definition, Sort of We represent that by the price elasticity of demand  the ratio of the percentage change in quantity demanded to the percent change in price

9. Elasticity An Illustration P Q 50 100

10. Elasticity Q = 100 – 2P P Q 50 100 20 60 64 18 Q = 100 – 2(20) = 60 Q = 100 – 2(18) =64

11. Elasticity New v. Old P Q 50 100 20 60 64 18 Q = 100 – 2(20) = 60 Q = 100 – 2(18) =64 But which is the new price and which is the old price? And does it make a difference?

12. Elasticity New v. Old P Q 50 100 20 60 64 18 Q = 100 – 2(20) = 60 Q = 100 – 2(18) =64 But which is the new price and which is the old price? And does it make a difference? Yes. Lets do the calculation assuming the price goes from 20 to 18 and then from 18 to 20?

13. Elasticity Going from 20 to 18 P Q 50 100 20 60 64 18

14. Elasticity Going from 20 to 18 P Q 50 100 20 60 64 18

15. Elasticity Going from 20 to 18 P Q 50 100 20 60 64 18

16. Elasticity Going from 18 to 20 P Q 50 100 20 60 64 18

17. Elasticity Going from 18 to 20 P Q 50 100 20 60 64 18

18. Elasticity Going from 18 to 20 P Q 50 100 20 60 64 18

19. Elasticity Going from 18 to 20 P Q 50 100 20 60 64 18

20. Elasticity So what is it?

21. Elasticity Two computational methods Point Elasticity of Demand Arc Elasticity of Demand

22. Elasticity Point Elasticity of Demand Defined by where Slope is the slope of the demand function

23. Elasticity Point Elasticity of Demand Defined by where Slope is the slope of the demand function In the case of a linear demand function Q = a – bP The slope is -b

24. Elasticity Computing the Point Elasticity P Q 50 100 20 60 64 18

25. Elasticity Computing the Point Elasticity P Q 50 100 20 60 64 18

26. Elasticity Computing at Q = 60 P Q 50 100 20 60 64 18

27. Elasticity Computing at Q = 64 P Q 50 100 20 60 64 18

28. Elasticity A Problem P Q 50 100 20 60 64 18 Compute the point price elasticity of demand at P = 25 and P = 35

29. Elasticity A Problem P Q 50 100 20 60 64 18 Compute the point price elasticity of demand at P = 25 and P = 35 When P = 25,  = -1 When P = 35,  = -2.333

30. Elasticity  along the Demand Function P Q 100 For a straight line demand curve  will vary over the demand curve

31. Elasticity  along the Demand Function P Q 100 When the curve hits the price axis,  = -   = - 

32. Elasticity  along the Demand Function P Q 100 When the curve hits the quantity axis,  = 0  = 0

33. Elasticity  along the Demand Function P Q 100 At the midpoint,  = -1  = -1

34. Elasticity Next Lecture Arc Elasticity Extensions

35. Elasticity End ©2004 Charles W. Upton