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Chapter 5 - ELasticity. After completing this unit, you should be able to: Define elasticity, classify elasticity values into inelastic and elastic categories, use the elasticity coefficient to assess the price elasticity of demand,…
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock PowerPoint Prepared by Z Pan Chapter Elasticity Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: ©Katja Bone/iStockphoto After studying this chapter, you should be able to: Ø Ø Ø Define elasticity Ø Classify elasticity values into inelastic and elastic categories Use the elasticity coefficient to assess the price elasticity of demand Copyright © 2013 John Wiley & Sons, Inc Ø Assess the relationship between elasticity and total revenue Describe the factors that determine the price elasticity of demand WHAT IS ELASTICITY? Ø Ø Elasticity is a measure of responsiveness between any two variables The Price Elasticity of Demand measures the responsiveness of quantity demanded to changes in price, all expressed in percentage terms Copyright © 2013 John Wiley CATEGORIES OF ELASTICITY Ø Ø Ø Elastic Demand: When a given percent change in the price of a good causes a larger percent change in the quantity demanded of the good Inelastic Demand: When a given percent change in the price of a good causes a smaller percent change in the quantity demanded of the good Unit Elastic Demand: When a given percent change in the price of a good causes an equal size percent change in the quantity demanded Copyright © 2013 John Wiley CATEGORIES OF ELASTICITY Perfectly Inelastic Demand: Quantity demanded does not change in response to a price change Copyright © 2013 John Wiley CATEGORIES OF ELASTICITY Perfectly Elastic Demand: Quantity demanded changes by an infinite amount in response to a price change Copyright © 2013 John Wiley THE ELASTICITY COEFFICIENT Copyright © 2013 John Wiley Summary of Elasticity Coefficient Values Copyright © 2013 John Wiley Elasticity and Total Revenue Ø Total Revenue (TR) is the amount of money earned when a supplier sells a given quantity of a good TR = $50/shirt x 20 shirts/day = $100/day TR = P * Q If P , but Q TR ? Depending on Ed Copyright © 2013 John Wiley Elasticity and Total Revenue If demand is elastic, the percentage change in quantity demanded is greater than the percentage change in price Elastic; Ed >1; (Ed = %ΔQ / %ΔP) %ΔQ >%ΔP; P↑ → TR↓ P↓ → TR↑ Copyright © 2013 John Wiley 10 Elasticity and Total Revenue If demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price Inelastic; Ed