Price Elasticity of Demand Price Elasticity and Total

Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide 7 CHAPTER Elasticity of Demand & Supply Next Slide End Show 7 -1 Copyright Mc. Graw-Hill/Irwin, 2005

PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide Think About It. . . THE LAW OF DEMAND SAYS. . . Consumers will buy more when prices go down and less when prices go up HOW MUCH MORE OR LESS? DOES IT MATTER? to whom? Next Slide Price Elasticity Provides an Answer End Show 7 -2 Copyright Mc. Graw-Hill/Irwin, 2005

Price Elasticity of Demand Price Elasticity and Total Revenue PRICE ELASTICITY OF DEMAND Measures Responsiveness to Price Changes P Determinants of Price Elasticity of Demand The percentage change in quantity The percentage change in price Price Elasticity of Supply Cross Elasticity of Demand . 01 Income Elasticity of Demand Key Terms Previous Slide . 02 P 1 Next Slide Q 2 Q 1 End Show 7 -3 Copyright Mc. Graw-Hill/Irwin, 2005 D Elasticity is. 5 Q

PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Commonly Expressed as… P Determinants of Price Elasticity of Demand The percentage change in quantity The percentage change in price Price Elasticity of Supply % Q d % P Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide P 2 P 1 Next Slide Q 2 Q 1 End Show 7 -4 Copyright Mc. Graw-Hill/Irwin, 2005 D Elasticity is. 5 Q

PRICE ELASTICITY OF DEMAND The Price-Elasticity Coefficient and Formula Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Ed = Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 -5 Next Slide Percentage change in quantity demanded of product X Percentage change in price of product X Or equivalently… Ed = Percentage change in quantity demanded of X Original quantity demanded of X Change in price of X Original price of X Elimination of the Minus Sign Copyright Mc. Graw-Hill/Irwin, 2005

PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Interpretations of Ed Elastic Demand Ed = . 04. 02 =2 . 01. 02 =. 5 Inelastic Demand Ed = Unit Elasticity Previous Slide End Show 7 -6 Next Slide Ed = Copyright Mc. Graw-Hill/Irwin, 2005 . 02 =1

PRICE ELASTICITY OF DEMAND Extreme Cases Price Elasticity of Demand Price Elasticity and Total Revenue Perfectly Inelastic Demand P Determinants of Price Elasticity of Demand D 1 Ed = 0 Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 -7 0 Q Perfectly Elastic Demand P Next Slide Ed = 0 Copyright Mc. Graw-Hill/Irwin, 2005 D 2 Q

PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Refinement – The Midpoint Formula Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide Ed = Change in quantity Sum of Quantities/2 Next Slide End Show 7 -8 Copyright Mc. Graw-Hill/Irwin, 2005 Change in price Sum of prices/2

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue P When prices are low, So is total revenue TR Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide D Q Next Slide End Show 7 -9 Copyright Mc. Graw-Hill/Irwin, 2005 Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue Total revenue rises with price to a P TR point. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 10 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue Total revenue rises then declines with price to a P TR point. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 11 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue Total revenue rises then declines with price to a P TR point. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 12 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue Total revenue rises then declines with price to a P TR point. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Total Revenue Test Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 13 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue Total revenue rises then declines with price to a P TR point. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 14 Next Slide Inelastic Demand Copyright Mc. Graw-Hill/Irwin, 2005 D Q Inelastic Demand Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue Total revenue rises then declines with price to a P TR point. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 15 Next Slide Elastic Demand Inelastic Demand Copyright Mc. Graw-Hill/Irwin, 2005 D Q Elastic Inelastic Demand Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity of Demand Price Elasticity and Total Revenue Total revenue rises then declines with price to a P TR point. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 16 Next Slide Unit Elastic Demand Inelastic Demand Copyright Mc. Graw-Hill/Irwin, 2005 D Q Elastic Inelastic Demand Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE Price Elasticity is. . . Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Inelastic from 0 to 1 Typical of necessities one must have Elastic from 1 to Typical of luxuries one wants Unit elastic when exactly = 1 Previous Slide End Show 7 - 17 Next Slide Price change does not reduce total revenue Copyright Mc. Graw-Hill/Irwin, 2005

Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 18 Next Slide DETERMINANTS OF PRICE ELASTICITY OF DEMAND • Substitutability • Proportion of Income • Luxuries versus Necessities • Time Applications. . . Large Crop Yields Excise Taxes Decriminalization of Illegal Drugs Minimum Wage Copyright Mc. Graw-Hill/Irwin, 2005

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand E s= Percentage change in quantity supplied of good X Percentage change in the price of good X Key Terms Previous Slide End Show 7 - 19 Next Slide Now, compare the immediate market period, the short-run, and long run. Copyright Mc. Graw-Hill/Irwin, 2005

PRICE ELASTICITY OF SUPPLY Immediate Market period Price Elasticity of Demand P Sm Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand An increase in demand without enough time to change supply causes… Po Key Terms Previous Slide End Show 7 - 20 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2005 Q

PRICE ELASTICITY OF SUPPLY Immediate Market period Price Elasticity of Demand P Sm Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Pm Po An increase in demand without enough time to change supply causes… an increase in price Key Terms D 2 Previous Slide End Show 7 - 21 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2005 Q

PRICE ELASTICITY OF SUPPLY Short Run Price Elasticity of Demand P Ss An increase in demand with less intensity supply use causes. . . Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Po Key Terms Previous Slide End Show 7 - 22 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2005 Q

PRICE ELASTICITY OF SUPPLY Short Run Price Elasticity of Demand P Ss An increase in demand with less intensity supply use causes. . . a lower increase in price Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Ps Income Elasticity of Demand Po Key Terms D 2 Previous Slide End Show 7 - 23 D 1 Next Slide Qo. Qs Copyright Mc. Graw-Hill/Irwin, 2005 Q

PRICE ELASTICITY OF SUPPLY Long Run Price Elasticity of Demand An increase in demand in the long run allows greater change causing. . . SL P Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Po Key Terms Previous Slide End Show 7 - 24 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2005 Q

PRICE ELASTICITY OF SUPPLY Long Run Price Elasticity of Demand An increase in demand in the long run allows greater change causing. . . SL P Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand PL Po Even more elastic response - less price increase Key Terms D 2 Previous Slide End Show 7 - 25 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2005 QL Q

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Applications of Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 26 Next Slide Antiques and Reproductions Volatile Gold Prices Copyright Mc. Graw-Hill/Irwin, 2005

CROSS ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Exy = Percentage change in quantity demanded of good X Percentage change in the price of good y Positive Sign Goods are Substitutes Negative Sign Goods are Complementary Previous Slide End Show 7 - 27 Next Slide Zero or Near-Zero Value Goods are Independent Copyright Mc. Graw-Hill/Irwin, 2005

INCOME ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 28 Next Slide Ei = Percentage change in quantity demanded Percentage change in income Positive Sign Goods are Normal or Superior Negative Sign Goods are Inferior Copyright Mc. Graw-Hill/Irwin, 2005

price elasticity of demand elastic demand inelastic demand unit elasticity perfectly inelastic demand perfectly elastic demand total revenue (TR) Copyright Mc. Graw-Hill/Irwin, 2005 total-revenue test price elasticity of supply market period short run long run cross elasticity of demand income elasticity of demand BACK END

Price Elasticity of Demand Next: Chapter 8 Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Key Terms Previous Slide End Show 7 - 30 Consumer Behavior and Utility Maximization Next Slide Copyright Mc. Graw-Hill/Irwin, 2005