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 20 CHAPTER Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide End Show 20 - 1 Next Slide Demand & Supply Elasticities & Government-Set Prices Copyright Mc. Graw-Hill/Irwin, 2002

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 Government-Set Prices Key Terms Previous Slide End Show 20 - 2 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 Copyright Mc. Graw-Hill/Irwin, 2002

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 Government-Set Prices Key Terms Previous Slide End Show 20 - 3 . 02 P 1 Next Slide Q 2 Q 1 Copyright Mc. Graw-Hill/Irwin, 2002 D Elasticity is. 5 Q

PRICE ELASTICITY OF DEMAND Commonly Expressed as… Price Elasticity of Demand Price Elasticity and Total Revenue 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 Government-Set Prices Key Terms Previous Slide End Show 20 - 4 P 2 P 1 Next Slide Q 2 Q 1 Copyright Mc. Graw-Hill/Irwin, 2002 D Elasticity is. 5 Q

PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand The Price-Elasticity Coefficient and Formula Ed = Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide End Show 20 - 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, 2002

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 Government-Set Prices Interpretations of Ed Elastic Demand Ed = . 04. 02 =2 . 01. 02 =. 5 Inelastic Demand Ed = Key Terms Unit Elastic Demand Previous Slide End Show 20 - 6 Next Slide Ed = Copyright Mc. Graw-Hill/Irwin, 2002 . 02 =1

PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Extreme Cases Perfectly Inelastic Demand P Determinants of Price Elasticity of Demand Ed = 0 Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide End Show 20 - 7 D 1 0 Q Perfectly Elastic Demand P Next Slide Ed = 0 Copyright Mc. Graw-Hill/Irwin, 2002 D 2 Q

PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity and Total Revenue Refinement – The Midpoints Formula Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide End Show 20 - 8 Ed = Change in quantity Sum of Quantities/2 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 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 Government-Set Prices Key Terms Previous Slide End Show 20 - 9 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 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 Government-Set Prices Key Terms Previous Slide End Show 20 - 10 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 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 Government-Set Prices Key Terms Previous Slide End Show 20 - 11 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 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 Government-Set Prices Key Terms Previous Slide End Show 20 - 12 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 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 Total Revenue Test Government-Set Prices Key Terms Previous Slide End Show 20 - 13 D Q Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 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 Government-Set Prices Key Terms Previous Slide End Show 20 - 14 Next Slide Inelastic Demand Copyright Mc. Graw-Hill/Irwin, 2002 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 Government-Set Prices Elastic Demand Key Terms Previous Slide End Show 20 - 15 Next Slide Inelastic Demand Copyright Mc. Graw-Hill/Irwin, 2002 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 Government-Set Prices Unit Elastic Demand Key Terms Previous Slide End Show 20 - 16 Next Slide Inelastic Demand Copyright Mc. Graw-Hill/Irwin, 2002 D Q Elastic Inelastic Demand Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE 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 Government-Set Prices End Show 20 - 17 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 Key Terms Previous Slide Price Elasticity is. . . Next Slide Price change does not reduce total revenue Copyright Mc. Graw-Hill/Irwin, 2002

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 Government-Set Prices Key Terms Previous Slide End Show 20 - 18 Next Slide DETERMINANTS OF PRICE ELASTICITY OF DEMAND • Substitutability • Proportion of Income • Luxuries versus Necessities • Time Applications. . . Bumper Crops Excise Taxes Decriminalization of Illegal Drugs Minimum Wage Copyright Mc. Graw-Hill/Irwin, 2002

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 Government-Set Prices Key Terms Previous Slide End Show 20 - 19 Next Slide Now compare the market period short-run, and long run. . . Copyright Mc. Graw-Hill/Irwin, 2002

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Market period P Sm Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices An increase in demand without enough time to change supply causes… Po Key Terms Previous Slide End Show 20 - 20 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2002 Q

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Market period P Sm Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Pm Po An increase in demand without enough time to change supply causes… an increase in price Key Terms Previous Slide End Show 20 - 21 D 2 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2002 Q

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Short Run P Ss An increase in demand with less intensity supply use causes. . . Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Po Key Terms Previous Slide End Show 20 - 22 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2002 Q

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Short Run P Ss An increase in demand with less intensity supply use causes. . . a lower increase in price Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Ps Po Key Terms Previous Slide End Show 20 - 23 D 2 D 1 Next Slide Qo. Qs Copyright Mc. Graw-Hill/Irwin, 2002 Q

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Long Run An increase in demand in the long run allows greater change causing. . . SL P Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Po Key Terms Previous Slide End Show 20 - 24 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2002 Q

PRICE ELASTICITY OF SUPPLY Price Elasticity of Demand Price Elasticity and Total Revenue Long Run An increase in demand in the long run allows greater change causing. . . SL P Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices PL Po Even more elastic response - less price increase Key Terms Previous Slide End Show 20 - 25 D 2 D 1 Next Slide Qo Copyright Mc. Graw-Hill/Irwin, 2002 QL Q

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 Government-Set Prices Key Terms Previous Slide End Show 20 - 26 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 Next Slide Zero or near-zero value Goods are Independent Copyright Mc. Graw-Hill/Irwin, 2002

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 Government-Set Prices Key Terms Ei = Percentage change in quantity demanded Percentage change in income Positive Sign Goods are Normal or Superior Negative Sign Previous Slide End Show 20 - 27 Next Slide Goods are Inferior Copyright Mc. Graw-Hill/Irwin, 2002

GOVERNMENT-SET PRICES 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 Government-Set Prices Key Terms Previous Slide End Show 20 - 28 Next Slide Price Ceilings & Shortages Rationing Problem Black Markets Rent Controls Credit Card Interest Ceilings Copyright Mc. Graw-Hill/Irwin, 2002

GOVERNMENT-SET PRICES Price Elasticity of Demand Price Elasticity and Total Revenue Price Ceilings & Shortages P D S Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms P Pc Legal Price Ceiling S Previous Slide End Show 20 - 29 D Next Slide SHORTAGE Copyright Mc. Graw-Hill/Irwin, 2002 Q

GOVERNMENT-SET PRICES Price Elasticity of Demand Price Floors & Surpluses P D Price Elasticity and Total Revenue S Determinants of Price Elasticity of Demand SURPLUS Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Pf Legal Price Floor P Key Terms S Previous Slide End Show 20 - 30 D Next Slide Qd Q Copyright Mc. Graw-Hill/Irwin, 2002 Qs Q

GOVERNMENT-SET PRICES Price Elasticity of Demand Price Floors & Surpluses P D Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Income Elasticity of Demand Government-Set Prices Chapter Legal Conclusions Price Floor SURPLUS Price Elasticity of Supply Cross Elasticity of Demand S Pf P Key Terms S Previous Slide End Show 20 - 31 D Next Slide Qd Q Copyright Mc. Graw-Hill/Irwin, 2002 Qs Q

price elasticity of demand elastic demand inelastic demand unit elasticity perfectly inelastic demand perfectly elastic demand total revenue total-revenue test Copyright Mc. Graw-Hill/Irwin 2002 price elasticity of supply market period short run long run cross elasticity of demand income elasticity of demand price ceiling black market price floor BACK END

Price Elasticity of Demand Price Elasticity and Total Revenue Next: Chapter 21 Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide End Show 20 - 33 Consumer Behavior and Utility Maximization Next Slide Copyright Mc. Graw-Hill/Irwin, 2002