Copyright © 2004 South-Western/Thomson Learning Elasticity = Responsiveness Allow us to analyze S & D with greater precision. Are measures of how much buyers and sellers respond to changes in market conditions. BY HOW MUCH?
Copyright © 2004 South-Western/Thomson Learning For any market shock… Examine if the supply or demand curve shifts. Determine the direction of the shift of the curve. Use the supply-and-demand diagram to see how the market equilibrium changes. Price Elasticity of Demand/Supply
Copyright © 2004 South-Western/Thomson Learning An Example of Price Elasticity of Demand Can good news for farming be bad news for farmers? What happens to wheat farmers and the market for wheat when scientists discover a new more productive wheat hybrid?
Figure 8 An Increase in Supply in the Market for Wheat Copyright©2003 Southwestern/Thomson Learning Quantity of Wheat 0 Price of Wheat and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220. Demand S1S1 S2S leads to a large fall in price When demand is inelastic, an increase in supply $3 100
Figure 8 An Increase in Supply in the Market for Wheat Copyright©2003 Southwestern/Thomson Learning $220
Copyright © 2004 South-Western/Thomson Learning Summary Price elasticity of demand measures how much the Qd responds to changes in the P. Change in S, P adjusts, Q responds, Law of D Price elasticity of demand is calculated as the % change in Qd divided by the % change in P. Demand is typically more elastic in the long run than in the short run.
Copyright © 2004 South-Western/Thomson Learning Summary If a demand curve is elastic, total revenue falls when the price rises. If a demand curve is inelastic, total revenue rises as the price rises. Don’t memorize this, test it, use logic
Copyright © 2004 South-Western/Thomson Learning Elasticity of a Linear Demand Curve Draw this D curve Calculate Total Revenue Calculate Elasticity
Copyright © 2004 South-Western/Thomson Learning Summary The price elasticity of supply measures how much the Qs responds to changes in the P. Change in D, P adjusts, Qs responds, Law of S The price elasticity of supply is calculated as the % change in Qs divided by the % change in P. Supply is typically more elastic in the long run than in the short run.
Copyright © 2004 South-Western/Thomson Learning Summary Income elasticity measures how much the Qd responds to changes in consumers’ income. normal good (+), inferior good (-) luxury good (>1), necessity good (<1) Cross-price elasticity measures how much the Qd of one good responds to changes in the price of another good. complement goods (-), substitute goods (+)