HUTECH Institute of International Education REVISION Movie tickets and DVDs are substitutes If the price of DVDs increases, what will happen in the market for movie tickets? The supply curve shifts[.]
REVISION Movie tickets and DVDs are substitutes If the price of DVDs increases, what will happen in the market for movie tickets? The demand curve shifts to the left The supply curve shifts to the right The supply curve shifts to the left The demand curve shifts to the right HUTECH Institute of International Education TOPIC ELASTICITY OF SUPPLY AND DEMAND 3.1 THE ELASTICITY OF DEMAND 3.2 THE ELASTICITY OF SUPPLY 3.3 APPLICATIONS OF SUPPLY, DEMAND & ELASTICITY HUTECH Institute of International Education Elasticity of Supply and Demand ELASTICITY ▪ Definition: Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants Eg: how much demand for your shoes will fall if you raise your price HUTECH Institute of International Education Elasticity of Supply and Demand 3.1 PRICE ELASTICITY OF DEMAND ▪ Price elasticity of demand measure how much QD of a good respond to 1% change in price of that good ▪ EDP is usually a negative number → Use absolute value (drop the minus sign) Price elasticity of demand HUTECH Institute of International Education Percentage change in QD = Percentage change in P Elasticity of Supply and Demand PRICE ELASTICITY OF DEMAND P Example: Price elasticity of demand equals 20% 10% P rises P2 by 10% P D = → Reflecting that the change in the quantity demanded is proportionately twice as large as the change in the price HUTECH Institute of International Education Q2 Q1 Q Q falls by 20% Elasticity of Supply and Demand PRICE ELASTICITY OF DEMAND Example: Calculate the price elasticity of demand between points, Point A: P = $4, Q = 120 Point B: P = $6, Q = 80 Answer: WHY DIFFERENCE? Going from point A to point B, EDP = 0.66 Going from point B to point A, EDP = 1.5 HUTECH Institute of International Education Elasticity of Supply and Demand (Q2 − Q1 )/[(Q2 + Q1 )/ ] = (P2 − P1 )/[(P2 + P1 )/ ] E.g ( 80 − 120 )/[( 80 + 120) / ] = =1 ( − )/[( + )/ ] HUTECH Institute of International Education Elasticity of Supply and Demand end value – start value x 100% % change = midpoint E.g 6–4 x 100% = 40% % change in P = HUTECH Institute of International Education Elasticity of Supply and Demand Variety of Demand Curve ▪ Economists classify demand curves according to their elasticity ▪ • • • • • Five different classifications of D curves: Perfectly inelastic demand Inelastic demand Unit elastic demand Elastic demand Perfectly elastic demand HUTECH Institute of International Education Elasticity of Supply and Demand Variety of Demand Curve “Perfectly inelastic demand” P D curve: vertical P1 Consumers’ price sensitivity: none Elasticity: HUTECH Institute of International Education D P2 P falls by 10% Q Q1 Q changes by 0% 11 Elasticity of Supply and Demand ...TOPIC ELASTICITY OF SUPPLY AND DEMAND 3. 1 THE ELASTICITY OF DEMAND 3. 2 THE ELASTICITY OF SUPPLY 3. 3 APPLICATIONS OF SUPPLY, DEMAND & ELASTICITY HUTECH Institute of International Education Elasticity. .. Institute of International Education Elasticity of Supply and Demand 3. 1 PRICE ELASTICITY OF DEMAND ▪ Price elasticity of demand measure how much QD of a good respond to 1% change in price of that... Unit elastic demand Elastic demand Perfectly elastic demand HUTECH Institute of International Education Elasticity of Supply and Demand Variety of Demand Curve “Perfectly inelastic demand? ?? P D curve: