Elasticity of Demand and Supply Mr. Bammel. Elasticity Helps us understand the degree of Changes in QD or QS due to an initial change of price or income;

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Presentation transcript:

Elasticity of Demand and Supply Mr. Bammel

Elasticity Helps us understand the degree of Changes in QD or QS due to an initial change of price or income; Mostly price though; Elasticity of Demand- the responsiveness/sensitivity of changes in Price; which will vary depending on the product; High Responsiveness means Elastic Low Responsiveness means inelastic

The Formula Must use the Midpoint formula for price elasticity coefficient:

Interpretations of the Formula E d  Greater than 1 – Elastic E d  Less than 1 – Inelastic E d  Equal to 1 – Unit Elastic If change in price has NO change on QD, then it would be perfectly Inelastic; If change in price causes QD to go from 0 to all that consumers can buy (= infinite), then it would be perfectly elastic;

Total-Revenue Test The importance to firms of Elasticity is how changes in price will effect the TR, thus profits: TR = P x Q Test: TR inverse of P change = D is elastic TR is direct with P change = D is inelastic TR has no change due to P change = Unit elastic

TR continued If Demand is Elastic: a decrease in P will increase TR, vice versa; If Demand is Inelastic: an increase in P will increase TR, vice versa; If Demand is Unit Elastic: whether we have an increase or decrease, TR will remain unchanged;

Determinants of Elasticity Substitutability Proportion of Income Luxuries vs. Necessities Time Discuss with a partner how these determinants will affect Demand Elasticity. Provide examples of how these would function.

Price Elasticity of Supply If QS is responsive to the change in price  Elastic If QS is unresponsive to the change in price  Inelastic Formula:

Read on pages 383 – 384… What is the factor which defines the elasticity of supply? Be sure to incorporate the concepts of market period, the short run, and the long run.

Cross and Income Elasticities Partner back up…one of you read in detail and understand Cross Elasticities and the other do the same for Income Elasticities. Cover the two subjects as I did with demand and supply elasticities; be sure to emphasize the formula, the purpose, etc.