7 - 1 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Supply Elasticity Start on ½ sheet of problems at door

7 - 2 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Law of Supply As the price goes up, producers can offer ____________. As the price goes down, producers will offer ____________. A positive curve. more less

7 - 3 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Elasticity of Supply The relative response of a change in quantity supplied to a relative change in price. More specifically the price elasticity of supply can be defined as: %ΔQS %ΔP

7 - 4 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Elasticity Rules: Type of Demand Elasticity FormulaAnswer Elastic% ∆ Q.S. > % ∆ P Inelastic% ∆ Q.S. < % ∆ P Perfectly Inelastic % ∆ Q.S. = 0 Perfectly ElasticAny ∆ P = 0 Unitary Elastic% ∆ Q.S. = % ∆ P E s > 1 0<E S <1 E S = 0 E S = ∞ E S = 1

7 - 5 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Determinants of Supply We already know that the determinants of Supply are: –Costs of Production –Related Products (similar resources) –# of Sellers –Changes in Expectations –TIME IS ANOTHER KEY FACTOR

7 - 6 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Time as a Factor 1.Short Run: the amount of time during which land and labor inputs can be changed, but not capital. Problem:inefficient, cuts profits, and/or forces business to raise prices

7 - 7 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Time as a Factor 2. Long Run: the amount of time during which land, labor and capital can be changed. Example: new larger factory Additions to existing factory New assembly lines

7 - 8 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show PoPo P Q D1D1 QoQo An increase in demand without enough time to change supply causes… SmSm Market period PRICE ELASTICITY OF SUPPLY

7 - 9 Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show PoPo PmPm P Q D1D1 QoQo D2D2 An increase in demand without enough time to change supply causes… an increase in price SmSm Market period PRICE ELASTICITY OF SUPPLY

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show PoPo P Q D1D1 QoQo Short Run PRICE ELASTICITY OF SUPPLY An increase in demand with less intensity supply use causes... SsSs

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show PoPo P Q D1D1 QoQo D2D2 Short Run PRICE ELASTICITY OF SUPPLY PsPs An increase in demand with less intensity supply use causes...a lower increase in price SsSs QsQs

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show PoPo P Q D1D1 QoQo Long Run PRICE ELASTICITY OF SUPPLY An increase in demand in the long run allows greater change causing... SLSL

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show PoPo P Q D1D1 QoQo D2D2 Long Run PRICE ELASTICITY OF SUPPLY PLPL An increase in demand in the long run allows greater change causing... SLSL QLQL Even more elastic response - less price increase

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Perfectly Inelastic Supply perfectly inelastic supply occurs when sellers have no choice in the production of a good, quantity stays constant regardless of price: Ex) stadium seating, concert tickets, artwork from deceased painters

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Perfectly Elastic Supply This elasticity alternative exists when the price is fixed, that is, an infinite range of quantities is associated with the same price. Perfectly elastic supply can occur when sellers have the choice among a large number of perfect substitutes in the production. Ex) Grilled Cheese Sandwich, think of the resources and how all can be substituted for/to something else.

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show Elasticity Final Thoughts 1.Almost anything is going to have a more elastic demand at higher prices than at lower prices. 2.When elasticity is calculated, it is done using a specific P eq 3.All products have a point above which demand will be elastic and below which demand is inelastic. 4.Total Revenue Test will reveal that point. 5.The point of all of this is that firms need to know which price will maximize revenue for their product and impact of changes to price.

Copyright McGraw-Hill/Irwin, 2002 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price Elasticity of Demand Price Elasticity of Supply Cross Elasticity of Demand Income Elasticity of Demand Government-Set Prices Key Terms Previous Slide Next Slide End Show End of Chapter 4!! Take Home Quiz. Due Next Class!!! Write all answers on a separate sheet of paper.