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    Microeconomics: Lecturer Anisha

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    Tasnimul Hassan Labib

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    © All Rights Reserved
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    Microeconomics: Lecturer Anisha

    Uploaded by

    Tasnimul Hassan Labib
    3 views27 pages

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    PPT 05

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    Copyright:

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    Download as pptx, pdf, or txt
    3 views27 pages

    Microeconomics: Lecturer Anisha

    Uploaded by

    Tasnimul Hassan Labib

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 27

    MICROECONOMICS

    LECTURER ANISHA
    ELASTICITY

    Elasticity is a measure of how much buyers


    and sellers respond to changes in market
    conditions

    Quantify the change in demand/supply


    The price elasticity of demand measures how much
    the quantity demanded responds to a change in price
    Elasticity of Demand

    Availability of close
    substitute Definition of market

    01 02 03 04

    Necessities vs Luxuries Time Horizon


    For example, suppose that a 10 percent increase in the price of an ice-cream
    cone causes the amount of ice cream you buy to fall by 20 percent. We
    calculate your elasticity of demand
    point A: price = $4 quantity = 120
    point B: price = $6 quantity = 80

    Midpoint method: (6 - 4) / 5 X
    100 = 40
    Price Elasticity of Demand
    TOTAL REVENUE
    the amount paid by buyers and received by sellers
    of a good, computed as the price of the good times
    the quantity sold

    TR = P X Q
    When demand is elastic: An increase in the price causes a decrease in
    total revenue.
    When demand is inelastic (a price elasticity less than 1): price and total
    revenue move in the same direction
    For the demand
    in this figure,
    total revenue is
    P X Q = 400
    Elasticity along
    a Linear
    Demand Curve

    At points with a low


    price and high quantity,
    the demand curve is
    inelastic.
    At points with a high
    price and low quantity,
    the demand curve is
    elastic.
    Other Demand
    Elasticities
    The Income Elasticity of
    Demand
    A measure of how much the
    quantity demanded of a good
    responds to a change in
    consumers’ income
    The Cross-Price Elasticity of Demand
    A measure of how much the
    quantity demanded of one
    good responds to a change in
    the price of another good
    ELASTICITY OF SUPPLY
    Price elasticity of Supply

    A measure of how much the quantity supplied of a


    good responds to a change in the price of that good
    Figure 6 The Price Elasticity of Supply

    (a) Perfectly Inelastic Supply: Elasticity Equals 0

    Price
    Supply

    $5

    4
    1. An
    increase
    in price . . .

    0 100 Quantity

    2. . . . leaves the quantity supplied unchanged.

    Copyright©2003 Southwestern/Thomson Learning


    Figure 6 The Price Elasticity of Supply

    (b) Inelastic Supply: Elasticity Is Less Than 1

    Price

    Supply
    $5

    4
    1. A 22%
    increase
    in price . . .

    0 100 110 Quantity

    2. . . . leads to a 10% increase in quantity supplied.

    Copyright©2003 Southwestern/Thomson Learning


    Figure 6 The Price Elasticity of Supply

    (c) Unit Elastic Supply: Elasticity Equals 1


    Price

    Supply
    $5

    4
    1. A 22%
    increase
    in price . . .

    0 100 125 Quantity


    2. . . . leads to a 22% increase in quantity supplied.

    Copyright©2003 Southwestern/Thomson Learning


    Figure 6 The Price Elasticity of Supply

    (d) Elastic Supply: Elasticity Is Greater Than 1


    Price

    Supply

    $5

    4
    1. A 22%
    increase
    in price . . .

    0 100 200 Quantity

    2. . . . leads to a 67% increase in quantity supplied.

    Copyright©2003 Southwestern/Thomson Learning


    Figure 6 The Price Elasticity of Supply

    (e) Perfectly Elastic Supply: Elasticity Equals Infinity


    Price

    1. At any price
    above $4, quantity
    supplied is infinite.

    $4 Supply

    2. At exactly $4,
    producers will
    supply any quantity.

    0 Quantity
    3. At a price below $4,
    quantity supplied is zero.

    Copyright©2003 Southwestern/Thomson Learning


    APPLICATION of ELASTICITY
    • Can good news for farming be bad news for farmers?

    • What happens to wheat farmers and the market for wheat


    when university agronomists discover a new wheat
    hybrid that is more productive than existing varieties?

    Copyright © 2004 South-Western/Thomson Learning


    An Increase in
    Supply in the
    Market for Wheat

    When an advance in farm


    technology increases the supply
    of wheat from S1 to S2, the price
    of wheat falls. Because the
    demand for wheat is inelastic, the
    increase in the quantity sold from
    100 to 110 is proportionately
    smaller than the decrease in the
    price from $3 to $2. As a result,
    farmers’ total revenue falls from
    $300 to $220.
    Compute the Price Elasticity of Supply

    1 0 0  11 0
    ( 1 0 0  11 0 ) / 2
    ED 
    3 .0 0  2 .0 0
    ( 3 .0 0  2 .0 0 ) / 2

     0 .0 9 5
       0 .2 4
    0 .4
    Supply is inelastic
    Copyright © 2004 South-Western/Thomson Learning

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