40708885 microeconomics hubbard o brien ch06

8/14/2019 40708885 Microeconomics Hubbard O Brien Ch06

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2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

Fernando & Yvonn

Quijano

Prepared by:

Chapter

#

Elasticity: The

Responsiveness ofDemand and Supply


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2 o$ 2% 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

Do People Care about the

Prices of Books?

6.1 Define the price elasticityof demandand understand how to measure it.

6.2 Understand the determinantsof theprice elasticityof demand.

6. Understand the relationship !etween

the price elasticityof demandandtotal revenue.

6.." Define the cross#price elasticityofdemand and the income elasticityofdemand$ and understand theirdeterminants and how they aremeasured.

6.% Use price elasticityand incomeelasticityto analy&e economicissues.

6.6 Define the price elasticityof supplyand understand its maindeterminants and how it ismeasured.

'earnin( )!*ectives

&n 200#, '.(. consumerss)ent almost *+ billion tobuy -.2 billion co)ies o$ne )rinted boos.


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hapte - o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

Elasticity: The Responsiveness of

Demand and upply

Elasticity A measure o$ homuch one economic /ariable

res)onds to changes inanother economic /ariable.


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hapte o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

+rice elasticity of demand heres)onsi/eness o$ the 1uantity demanded to achange in )rice, measured by di/iding the)ercentage change in the 1uantity demanded

o$ a )roduct by the )ercentage change in the)roduct"s )rice.

The Price Elasticity of Demand and !ts "easurement

'earnin(!becti/e 6.1

Measuring the Price Elasticity of Demand


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hapte + o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

Elastic demand 3emand is elastic hen the )ercentagechange in 1uantity demanded is greater than the)ercentage change in )rice, so the )rice elasticity isgreater than 4 in absolute /alue.



,nelastic demand 3emand is inelastic hen the)ercentage change in 1uantity demanded is lessthan the )ercentage change in )rice, so the )riceelasticity is less than 4 in absolute /alue.

Elastic Demand and Inelastic Demand

Unit#elastic demand 3emand is unit5elastic henthe )ercentage change in 1uantity demanded is e1ualto the )ercentage change in )rice, so the )riceelasticity is e1ual to 4 in absolute /alue.


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hapte # o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.



An Example of Computing Price Elasticities

-,URE 6#1

Elastic and ,nelastic

Demand /urves


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hapte 6 o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.



The Midpoint Formula

Price elasticity of demand =


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SolvedProblem 6#1/alculatin( the +rice

Elasticity of Demand



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hapte % o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.



When Demand Curves Intersect the FlatterCurve Is More Elastic

Polar 7ases o$ Per$ectly Elastic and Per$ectly &nelastic 3emand

+erfectly inelastic demand he casehere the 1uantity demanded is com)letelyunres)onsi/e to )rice, and the )riceelasticity o$ demand e1uals ero.

+erfectly elastic demand he casehere the 1uantity demanded is in$initelyres)onsi/e to )rice, and the )rice elasticityo$ demand e1uals in$inity.


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Polar Cases of Perfectly Elastic and Perfectly Inelastic DemandTa!le 6#1

Summary of the +rice

Elasticities of Demand


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Ta!le 6#1


Elasticities of Demand 0continued


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3on"t 9et his Ha))en to)U33on"t 7on$use &nelastic ith Per$ectly &nelastic


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hapte 4- o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

The Determinants of the Price Elasticity of Demand


4 5vaila!ility of /lose Su!stitutes

4 +assa(e of Time

4 'uuries versus 7ecessities

4 Definition of the 8ar9et

4 Share of a ood in a /onsumers ;ud(et

he ey determinants o$ the )rice elasticity o$ demandare as $ollos:

,s the Demand for ;oo9s +erfectly ,nelasticS +R,/E

Rugrats in Paris *22.# *22.%%

he ?ummy Returns 2#.%8 22.%8

?iss 7ongeniality 4#.#% 22.%8

he Per$ect (torm 2.%8 22.%%

When D&Ds !ere first introduced themovie studios !ere uncertain a"out

their price elasticity of demand'

'earnin( !becti/e 6 "


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Chapte 22 o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

/ross#price elasticity of demand he)ercentage change in 1uantity demanded o$ onegood di/ided by the )ercentage change in the

)rice o$ another good.

'ther Demand Elasticities

'earnin(!becti/e 6."

Cross(Price Elasticity of Demand



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Chapte 2- o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.


Cross(Price Elasticity of Demand


,- T>E+R)DU/TS 5RE . . .

T>E7 T>E /R)SS#+R,/EE'5ST,/,T )- DE857D

?,'' ;E. @ EA58+'E

substitutes )ositi/eo brands o$ digital music)layers

com)lements negati/e 3igital music )layers and

song donloads $rom onlinemusic stores

unrelated ero3igital music )layers and)eanut butter

Ta!le 6#

Summary of /ross#+rice Elasticity of Demand



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Income Elasticity of Demand


,ncome elasticity of demand

A measure o$ the res)onsi/eness o$1uantity demanded to changes in

income, measured by the )ercentagechange in 1uantity demanded di/idedby the )ercentage change in income.



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Chapte 2+ o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.


Income Elasticity of Demand


,- T>E ,7/)8E E'5ST,/,T

)- DE857D ,S . . .

T>E7 T>E ))D ,S . . .

EA58+'E

)ositi/e, but less than 4 normal and a necessity?il

)ositi/e and greater than 4 normal and a lu;ury 7a/iar

negati/e in$erior High5$at ?eat

Ta!le 6#"

Summary of ,ncome

Elasticity of

Demand



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Chapte 2# o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.


Price Elasticity( Cross)Price Elasticity( and !ncome Elasticityin the "arket for *lcoholic Bevera$es

8a9in(the

/onnection

Price elasticity o$ demand $or beer 50.2-

7ross5)rice elasticity o$ demand beteen

beer and ine 0.-47ross5)rice elasticity o$ demand beteenbeer and s)irits 0.4+

&ncome elasticity o$ demand $or beer 50.0%

&ncome elasticity o$ demand $or ine +.0-

&ncome elasticity o$ demand $or s)irits 4.24

'earnin( !becti/e 6 %


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+sin$ Elasticity to *naly,e the Disappearin$

-amily -arm

'earnin(!becti/e 6.%

-i(ure 6#"

Elasticity and the

Disappearin( -arm

'earnin( !becti/e 6 %


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SolvedProblem 6#%Usin( +rice Elasticity to 5naly&e

+olicy toward ,lle(al Dru(s

'earnin(!becti/e 6.%

@eri$y that the )ercentage change in 1uantity demanded is 4.%.

'earnin( !becti/e 6 6


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Chapte 2% o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

The Price Elasticity of upply and !ts "easurement

Measuring the Price Elasticity of )upply


+rice elasticity of supply he res)onsi/enesso$ the 1uantity su))lied to a change in )rice,measured by di/iding the )ercentage change in

the 1uantity su))lied o$ a )roduct by the)ercentage change in the )roduct"s )rice.

'earnin( !becti/e 6 6


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Chapte -0 o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.


Determinants of the Price Elasticity of )upply


>hether su))ly is elastic or inelastic de)ends onthe ability and illingness o$ $irms to alter the1uantity they )roduce as )rice increases.

!$ten, $irms ha/e di$$iculty increasing the 1uantityo$ the )roduct they su))ly during any short )eriodo$ time.

'earnin( !becti/e 6.6


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.hy *re 'il Prices o +nstable?8a9in(

the

/onnection



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Polar Cases of Perfectly Elastic and Perfectly Inelastic )upply


Ta!le 6#%


Elasticities of Supply



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Chapte -- o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.


Polar Cases of Perfectly Elastic and Perfectly Inelastic )upply


Ta!le 6#%


Elasticities of Supply 0continued



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Chapte - o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.


*sing Price Elasticity of )upply to Predict Changes in Price


-i(ure 6#%

/han(es in +rice Depend on the +rice Elasticity of Supply



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Chapte -+ o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.



(

Ta!le 6#6

Summary of Elasticities



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Chapte -# o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.



(

Ta!le 6#6


0continued



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(

Ta!le 6#6


0continued


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Chapte -% o$ 0 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patric !"Brien, 2e.

5n ,nside '))B Borders 7hanges &ts Reards Program

Borders (lashes Buyer Reards, 7uts 3iscounts


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Ch

7ross5)rice elasticity o$ demand

Elastic demand

Elasticity

&ncome elasticity o$ demand&nelastic demand

Per$ectly elastic demand

Per$ectly inelastic demand

Price elasticity o$ demand

Price elasticity o$ su))ly

otal re/enue

'nit5elastic demand

B e y T e r m s

40708885 microeconomics hubbard o brien ch06

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