Chapter 4: Elasticity of Demand and Supply

Chapter 4Elasticity of Demand and SupplyMcGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedPrice Elasticity of DemandMeasures buyers’ responsiveness to price changesElastic demandSensitive to price changesLarge change in quantityInelastic demandInsensitive to price changesSmall change in quantity4-*Price-Elasticity Coefficient FormulaFormula for price elasticity of demand Percentage change in quantitydemanded of product XPercentage change in priceof product XEd =4-*Price-Elasticity Coefficient FormulaUse the midpoint formulaEnsures consistent results Ed = ÷Change in quantityChange in priceSum of quantities / 2Sum of prices / 24-*Price-Elasticity Coefficient FormulaUse percentagesUnit-free measureCompare responsiveness across productsEliminate the minus signEasier to compare elasticities4-*Interpretation of Elasticity of Demand Ed > 1: demand is elastic Ed = 1: demand is unit elastic Ed 1Unit ElasticEd = 1InelasticEd 1: supply is elasticEs < 1: supply is inelastic Percentage change in quantitysupplied of product XPercentage change in priceof product XEs =4-*Price Elasticity of SupplyTime is primary determinant of elasticity of supplyTime periods consideredMarket periodShort runLong run4-*Elasticity of Supply: The Market Period Perfectly inelastic supplyD1D2SmQ0PmP04-*Elasticity of Supply: The Short RunSupply is more elastic than in market periodD1D2SsQ0PsP0Qs4-*Elasticity of Supply: The Long RunLO3Supply is even more elastic than in the short runD1D2SlQ0PlP0Ql4-*Applications of Elasticity of SupplyAntiquesInelastic supply ReproductionsMore elastic supplyVolatile gold pricesInelastic supply4-*Income Elasticity of DemandMeasures responsiveness of buyers to changes in income Normal goods — positive signInferior goods — negative sign Percentage change in quantity demanded Ei = Percentage change in income4-*Income Elasticity InsightsHigh income elasticitiesMost affected by a recessionLow or negative incomeLeast affected by a recession4-*Cross-Elasticity of DemandMeasures responsiveness of sales to change in the price of another goodSubstitutes — positive signComplements — negative signIndependent goods — zero Percentage change in quantity demanded of product XEx,y = Percentage change in price of product Y4-*Cross-Elasticity of DemandApplicationChange the price?Allow a merger?4-*