5.1. elasticity of supply
TRANSCRIPT
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Elasticity
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Elastic Demand When % Change in Quantity Demanded > %Change in Price
Unit Elastic Demand When % Change in QuantityDemanded = % Change in Price
Inelastic Demand When % Change in Quantity Demanded 1, then the % Change in Qd > % Change is Price anddemand is said to be elastic
An increase in price will reduce total revenue
A decrease in price will increase total revenue
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Significance of Price Elasticity of Demand
If Ep < 1, then the % change in Qd < % change in price, anddemand is said to be inelastic
An increase in price will increase total revenue
A decrease in price will decrease total revenue
If Ep = 1, then the % change in Qd = % change in Price, anddemand is said to be unit elastic
An increase in price will have no impact on total revenue
A decrease in price will have no impact on total revenue
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Price Elasticity of Supply
A measure of the extent to which the quantitysupplied of a good changes when the price of the
good changes, and all other influences on sellersplans remain the same (ceteris paribus)
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Price Elasticity of Supply
Perfectly Elastic Supply When the quantity supplied changesby a very large percentage in response to an almost zeroincrease in price
Elastic Supply When the % change in the quantity supplied >
the % change in the price Unit Elastic Supply When the % change in the quantity
supplied = the % change in price Inelastic Supply When the % change in the quantity supplied
is < the % change in price Perfectly Inelastic Supply When the quantity supplied
remains the same as the price changes
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Influences on Price Elasticity of Supply
1. Fixed Production = inelastic price elasticity
2. Time Elapse longer time, > price elasticity
3. Storage Possibilities The better the storability, the more elastic is the price
elasticity of supply
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Computing Price Elasticity of Supply
Percentage change in quantity supplied
Percentage change in price
If Price Elasticity of Supply > 1, Supply is elastic
If Price Elasticity of Supply = 1, Supply is unit elastic
If price elasticity of supply< 1, Supply is inelastic
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Computing Price Elasticity of Supply
Percentage change in quantity supplied
Percentage change in price
If Price Elasticity of Supply > 1, Supply is elastic
If Price Elasticity of Supply = 1, Supply is unit elastic
If price elasticity of supply< 1, Supply is inelastic
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Figure The Price Elasticity of Supply
Copyright2003 Southwestern/Thomson Learning
(a) Perfectly Inelastic Supply: Elasticity Equals 0
$5
4
Supply
Quantity 1000
1. Anincreasein price . . .
2. . . . leaves the quantity supplied unchanged.
Price
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Figure 6 The Price Elasticity of Supply
Copyright2003 Southwestern/Thomson Learning
(b) Inelastic Supply: Elasticity Is Less Than 1
110
$5
100
4
Quantity 0
Price
Supply
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Figure 6 The Price Elasticity of Supply
Copyright2003 Southwestern/Thomson Learning
(c) Unit Elastic Supply: Elasticity Equals 1
125
$5
100
4
Quantity 0
Price
Supply
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Figure 6 The Price Elasticity of Supply
Copyright2003 Southwestern/Thomson Learning
(d) Elastic Supply: Elasticity Is Greater Than 1
Quantity 0
Price
4
100
$5
200
Supply
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Cross Elasticity of Demand
A measure of the extent to which the demand for agood changes when the price of a substitute orcomplement changes, ceteris paribus
% Change in Quantity Demanded
% Change in Price of one of its
substitutes or complements
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Income Elasticity of Demand
A measure of the extent to which the demandfor a good changes when income changes,ceteris paribus
% Change in Quantity Demanded
% Change in Income
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Income Elasticity
Types of Goods Normal Goods Inferior Goods
Higher income raises the quantity demandedfor normal goods but lowers the quantitydemanded for inferior goods.
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Contd..
Goods consumers regard as necessities tendto be income inelastic
Examples include food, fuel, clothing, utilities, andmedical services.
Goods consumers regard as luxuries tend tobe income elastic.
Examples include sports cars, and expensivefoods.
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Income Elasticity of Demand
If income elasticity of demand > 1 the demand forthe good is income elastic
If income elasticity of demand is between
0 and 1, the demand is income inelastic* If income elasticity of demand < 0 the demand isnegative income elastic
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Figure 1The Price Elasticity of Demand
(a) Perfectly Inelastic Demand: Elasticity Equals 0
$54
Quantity
Demand
1000
1. Anincreasein price . . .
2. . . . leaves the quantity demanded unchanged.
Price