Elasticity
Chapter 9 – Elasticity and Demand
Demand and Elasticity
Elasticity is a way to measure the responsiveness of a dependent variable to changes in an independent variable. Elasticity is defined as a ratio of the percentage change in a dependent variable to a percentage change in an independent variable.
Elasticity ≡
percentage change of dependent variable Percentage change of independent variable
When: Y = f(X) %ΔY E ≡ %ΔX
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 1
Chapter 9 – Elasticity and Demand
Examples of Elasticity
If, QX = f (PX, PR, M, . . . #buyers),
1) It may be useful to know how a change in the price of good X (ΔPX) will alter the quantity purchased at each price (ΔQX). Price elasticity (EP, εp, ηP, eP ) measures this relationship. 2) Income elasticity is a measure of how a change in income (ΔM) will change the quantity (ΔQX) that will be purchased at each price. 3) Cross elasticity is a measure of how a change in the price of good Y (ΔPY) will change the quantity demanded of good X (ΔQX)
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 2
Chapter 9 – Elasticity and Demand
“Own” Price Elasticity of Demand
Price Elasticity of Demand (EP) is a measure of how responsive buyers are to changes in the price of a good. Price elasticity is determined by: ⎛ ΔQ ⎞ 1) the slope of the demand function,⎜ ΔP ⎟
⎝ ⎠
2) the location on the demand function P (Q, P, or more accurately, )
Q
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 3
Chapter 9 – Elasticity and Demand
Calculation of Price Elasticity
Q % Δ Quantity = % Δ Price ΔP P
By rearranging terms:
10
ΔQ
EP =
ΔQX PX EP = * ΔPX QX
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 4
Chapter 9 – Elasticity and Demand
Calculation of Price Elasticity -
ΔQX PX EP = * ΔPX QX
ΔQX is the slope of ΔPX the demand function
PX is the location QX on the demand function
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 5
Chapter 9 – Elasticity and Demand
Example of “Point” of Price Elasticity
10
Demand and Elasticity
Elasticity is a way to measure the responsiveness of a dependent variable to changes in an independent variable. Elasticity is defined as a ratio of the percentage change in a dependent variable to a percentage change in an independent variable.
Elasticity ≡
percentage change of dependent variable Percentage change of independent variable
When: Y = f(X) %ΔY E ≡ %ΔX
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 1
Chapter 9 – Elasticity and Demand
Examples of Elasticity
If, QX = f (PX, PR, M, . . . #buyers),
1) It may be useful to know how a change in the price of good X (ΔPX) will alter the quantity purchased at each price (ΔQX). Price elasticity (EP, εp, ηP, eP ) measures this relationship. 2) Income elasticity is a measure of how a change in income (ΔM) will change the quantity (ΔQX) that will be purchased at each price. 3) Cross elasticity is a measure of how a change in the price of good Y (ΔPY) will change the quantity demanded of good X (ΔQX)
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 2
Chapter 9 – Elasticity and Demand
“Own” Price Elasticity of Demand
Price Elasticity of Demand (EP) is a measure of how responsive buyers are to changes in the price of a good. Price elasticity is determined by: ⎛ ΔQ ⎞ 1) the slope of the demand function,⎜ ΔP ⎟
⎝ ⎠
2) the location on the demand function P (Q, P, or more accurately, )
Q
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 3
Chapter 9 – Elasticity and Demand
Calculation of Price Elasticity
Q % Δ Quantity = % Δ Price ΔP P
By rearranging terms:
10
ΔQ
EP =
ΔQX PX EP = * ΔPX QX
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 4
Chapter 9 – Elasticity and Demand
Calculation of Price Elasticity -
ΔQX PX EP = * ΔPX QX
ΔQX is the slope of ΔPX the demand function
PX is the location QX on the demand function
Fal l ’05 © Reynolds 2005
Microeconomics
Slide 5
Chapter 9 – Elasticity and Demand
Example of “Point” of Price Elasticity
10