 # 1 Elasticity and its Application Chapter 5 2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

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1 Elasticity and its Application Chapter 5

2 Price Elasticity Sensitivity of quantity demanded (or supplied) to a change in price.

3 Computing the Price Elasticity of Demand Demand is price elastic \$5 4 Demand Quantity 100050 Price

Figure 1 The Price Elasticity of Demand Copyright©2003 Southwestern/Thomson Learning (a) Perfectly Inelastic Demand: Elasticity Equals 0 \$5 4 Quantity Demand 100 0 1. An increase in price... 2.... leaves the quantity demanded unchanged. Price

Figure 1 The Price Elasticity of Demand (b) Inelastic Demand: Elasticity Is Less Than 1 Quantity 0 \$5 90 Demand 1. A 22% increase in price... Price 2.... leads to an 11% decrease in quantity demanded. 4 100

Figure 1 The Price Elasticity of Demand Copyright©2003 Southwestern/Thomson Learning 2.... leads to a 22% decrease in quantity demanded. (c) Unit Elastic Demand: Elasticity Equals 1 Quantity 4 100 0 Price \$5 80 1. A 22% increase in price... Demand

Figure 1 The Price Elasticity of Demand (d) Elastic Demand: Elasticity Is Greater Than 1 Demand Quantity 4 100 0 Price \$5 50 1. A 22% increase in price... 2.... leads to a 67% decrease in quantity demanded.

Figure 1 The Price Elasticity of Demand (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price \$4 Demand 2. At exactly \$4, consumers will buy any quantity. 1. At any price above \$4, quantity demanded is zero. 3. At a price below \$4, quantity demanded is infinite.

9 Revenue

Figure 2 Total Revenue Copyright©2003 Southwestern/Thomson Learning Demand Quantity Q P 0 Price P × Q = \$400 (revenue) \$4 100

Figure 3 How Total Revenue Changes When Price Changes: Inelastic Demand Copyright©2003 Southwestern/Thomson Learning Demand Quantity 0 Price Revenue = \$100 Quantity 0 Price Revenue = \$240 Demand \$1 100 \$3 80 An Increase in price from \$1 to \$3 … … leads to an Increase in total revenue from \$100 to \$240

Figure 4 How Total Revenue Changes When Price Changes: Elastic Demand Copyright©2003 Southwestern/Thomson Learning Demand Quantity 0 Price Revenue = \$200 \$4 50 Demand Quantity 0 Price Revenue = \$100 \$5 20 An Increase in price from \$4 to \$5 … … leads to an decrease in total revenue from \$200 to \$100

13 Other Elasticity Measures Price elasticity of supply Cross price elasticity Income elasticity

Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (a) Perfectly Inelastic Supply: Elasticity Equals 0 \$5 4 Supply Quantity100 0 1. An increase in price... 2.... leaves the quantity supplied unchanged. Price

Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (b) Inelastic Supply: Elasticity Is Less Than 1 110 \$5 100 4 Quantity 0 1. A 22% increase in price... Price 2.... leads to a 10% increase in quantity supplied. Supply

Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (c) Unit Elastic Supply: Elasticity Equals 1 125 \$5 100 4 Quantity 0 Price 2.... leads to a 22% increase in quantity supplied. 1. A 22% increase in price... Supply

Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (d) Elastic Supply: Elasticity Is Greater Than 1 Quantity 0 Price 1. A 22% increase in price... 2.... leads to a 67% increase in quantity supplied. 4 100 \$5 200 Supply

Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (e) Perfectly Elastic Supply: Elasticity Equals Infinity Quantity 0 Price \$4 Supply 3. At a price below \$4, quantity supplied is zero. 2. At exactly \$4, producers will supply any quantity. 1. At any price above \$4, quantity supplied is infinite.

19 Applications of Elasticity

20 Bumper Crops

21 OPEC & Oil Prices

22 The War on Drugs

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