1. Measurement and Interpretation of Elasticities
Chapter 5

2. Discussion Topics Own price elasticity of demand
Income elasticity of demand
Cross price elasticity of demand
Other general properties
Applicability of demand elasticities

3. Key Concepts Covered…
Own price elasticity = %Qbeef for a given %Pbeef
Income elasticity = %Qbeef for a given %Income
Cross price elasticity = %Qbeef for a given %Pchicken
Arc elasticity = range along the demand curve
Point elasticity = point on the demand curve
Price flexibility = reciprocal of own price elasticity

4. Own Price Elasticity of Demand

5. Own Price Elasticity of Demand
Percentage change in quantity =
Percentage change in price
Arc Elasticity Approach
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6. Own Price Elasticity of Demand
Percentage change in quantity =
Percentage change in price
Arc elasticity
Own price elasticity of demand
Equation 5.3
= [QP] x [PQ]
where:
P = (Pa + Pb) 2;
Q = (Qa + Qb) 2;
Q = (Qa – Qb); and
P = (Pa – Pb)
The subscript “a” here again
stands for “after” while “b”
stands for “before”
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7. Own Price Elasticity of Demand
Percentage change in quantity =
Percentage change in price
Arc elasticity
The “bar” over the P and
Q variables indicates an
average or midpoint.
Own price elasticity of demand
= [QP] x [PQ]
where:
P = (Pa + Pb) 2;
Q = (Qa + Qb) 2;
Q = (Qa – Qb); and
P = (Pa – Pb)
The subscript “a” here again
stands for “after” while “b”
stands for “before”
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8. Own Price Elasticity of Demand
Percentage change in quantity =
Percentage change in price
Specific range
on curve
Arc elasticity Pb
Own price elasticity of demand Pa
= [QP] x [PQ] Qb Qa
where:
P = (Pa + Pb) 2;
Q = (Qa + Qb) 2;
Q = (Qa – Qb); and
P = (Pa – Pb)
The subscript “a” here again
stands for “after” while “b”
stands for “before”
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9. Interpreting the Own Price Elasticity of Demand
If elasticity coefficient is:
Demand is said to be:
% in quantity is:
Greater than 1.0
Elastic
Greater than % in price
Equal to 1.0
Unitary elastic
Same as % in price
Less than 1.0
Inelastic
Less than % in price
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10. Demand Curves Come in a Variety of Shapes

11. Demand Curves Come in a Variety of Shapes
Perfectly inelastic
Perfectly elastic
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12. Demand Curves Come in a Variety of Shapes
Inelastic
Elastic

13. Demand Curves Come in a Variety of Shapes
Elastic where %Q > % P
Unitary Elastic where %Q = % P
Inelastic where %Q < % P
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14. Example of arc own-price elasticity of demand
Unitary elasticity…a one
for one exchange
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15. Elastic demand
Inelastic demand
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16. Elastic Demand Curve Price c Pb Cut in price Brings about a larger Pa
increase in the quantity
demanded Pa
Qb Qa
Quantity

17. Elastic Demand Curve Price What happened to producer revenue?
consumer surplus? c Pb Pa
Qb Qa
Quantity

18. Elastic Demand Curve Price Producer revenue increases since %P
is less that %Q.
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa. c a Pb b Pa
Qb Qa
Quantity

19. Elastic Demand Curve Price Producer revenue increases since %P
is less that %Q.
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa. c a Pb b Pa
Qb Qa
Quantity

20. Elastic Demand Curve Price Producer revenue increases since %P
is less that %Q.
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa. c a Pb b Pa
Qb Qa
Quantity

21. Revenue Implications Own-price elasticity is: Cutting the price will:
Increasing the price will:
Elastic
Increase revenue
Decrease revenue
Unitary elastic
Not change revenue
Inelastic
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22. Elastic Demand Curve Price Consumer surplus before the price cut
was area Pbca. c a Pb b Pa
Qb Qa
Quantity

23. Elastic Demand Curve Price Consumer surplus after the price cut is
Area Pacb. c a Pb b Pa
Qb Qa
Quantity

24. Elastic Demand Curve Price So the gain in consumer surplus
after the price cut is
area PaPbab. c a Pb b Pa
Qb Qa
Quantity

25. Inelastic Demand Curve
Price Pb
Cut in
price Pa
Brings about a smaller
increase in the quantity
demanded
Qb Qa
Quantity

26. Inelastic Demand Curve
Price Pb
What happened to
producer revenue?
consumer surplus? Pa
Qb Qa
Quantity

27. Inelastic Demand Curve
Price a Pb
Producer revenue
falls since %P is
greater than %Q.
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa. Pa b
Qb Qa
Quantity

28. Inelastic Demand Curve
Price a Pb
Producer revenue
falls since %P is
greater than %Q.
Revenue before the
change was 0PbaQb.
Revenue after the
change was 0PabQa. Pa b
Qb Qa
Quantity

29. Inelastic Demand Curve
Price a Pb
Consumer surplus
increased by area
PaPbab Pa b
Qb Qa
Quantity

30. Revenue Implications Own-price elasticity is: Cutting the price will:
Increasing the price will:
Elastic
Increase revenue
Decrease revenue
Unitary elastic
Not change revenue
Inelastic
Characteristic of agriculture
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31. Retail Own Price Elasticities
Beef =
Cheese =
Bananas =
Milk =
Carrots =
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32. Interpretation
Let’s take rice as an example, which has an own price elasticity of
This suggests that if the price of rice drops by 10%, for example, the quantity of rice demanded will only increase by 1.467%. P
Rice producer
Revenue?
Consumer surplus?
10% drop
1.467% increase Q

33. Example
1. The Dixie Chicken sells 1,500 Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be – If the Chicken increases the price of the platter by 70 cents:
How many platters will the chicken sell?__________
b. The Chicken’s revenue will change by $__________
c. Consumers will be ____________ off as a result of this price change.

34. The answer…
1. The Dixie Chicken sells 1,500 Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be – If the Chicken increases the price of the platter by 70 cents:
How many platters will the chicken sell?__1,110____
Solution:
-1.30 = %Q%P
-1.30= %Q[20%]
%Q=(-1.30 × 20) = –26%
So the new quantity of burger platters is 1,110, or
(1-.26) ×1,500, or .74 ×1,500

35. The answer…
1. The Dixie Chicken sells 1,500 Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be – If the Chicken increases the price of the platter by 70 cents:
How many platters will the chicken sell?__1,110____
b. The Chicken’s revenue will change by $__-$588___
Solution:
Current revenue = 1,500 × $3.50 = $5,250 per month
New revenue = 1,110 × $4.20 = $4,662 per month
So revenue decreases by $588 per month, or $4,662
minus $5,250

36. The answer…
1. The Dixie Chicken sells 1,500 Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be – If the Chicken increases the price of the platter by 70 cents:
How many platters will the chicken sell?__1,110____
b. The Chicken’s revenue will change by $__-$588___
Consumers will be __worse___ off as a result of this price change.
Why? Because price increased.

37. Income Elasticity of Demand

38. Income Elasticity of Demand
Percentage change in quantity =
Percentage change in income
= [QI] x [IQ]
where:
I = (Ia + Ib) 2
Q = (Qa + Qb) 2
Q = (Qa – Qb)
I = (Ia – Ib)
Indicates potential
changes or shifts in
the demand curve as
consumer income (I)
changes….
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39. Interpreting the Income Elasticity of Demand
If the income elasticity is equal to:
The good is classified as:
Greater than 1.0
A luxury and a normal good
Less than 1.0 but greater than 0.0
A necessity and a normal good
Less than 0.0
An inferior good!
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40. Some Examples Commodity Own Price elasticity Income elasticity Elastic
Beef
0.4549
Chicken
.3645
Cheese
0.5927
Rice
Lettuce
0.2344
Tomatoes
0.4619
Fruit juice
1.1254
Grapes
0.4407
Nonfood items
1.1773
Elastic
Inferior good
Luxury good
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41. Example
Assume the government cuts taxes, thereby increasing disposable income by 5%. The income elasticity for chicken is
What impact would this tax cut have upon the demand for chicken?
Is chicken a normal good or an inferior good? Why?

42. The Answer
1. Assume the government cuts taxes, thereby increasing disposable income (I) by 5%. The income elasticity for chicken is
What impact would this tax cut have upon the demand for chicken?
Solution:
.3645 = %QChicken  % I
.3654 = %QChicken  5
%QChicken = 5 = %

43. The Answer
1. Assume the government cuts taxes, thereby increasing disposable income by 5%. The income elasticity for chicken is
What impact would this tax cut have upon the demand for chicken? _____ %___
Is chicken a normal good or an inferior good? Why?
Chicken is a normal good but not a luxury since the income elasticity is > 0 but < 1.0

44. Cross Price Elasticity of Demand

45. Cross Price Elasticity of Demand
Percentage change in quantity =
Percentage change in another price
= [QHPT] × [PTQH]
where:
PT = (PTa + PTb) 2
QH = (QHa + QHb) 2
QH = (QHa – QHb)
PT = (PTa – PTb)
Indicates potential
changes or shifts in
the demand curve as
the price of other
goods change…
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46. Interpreting the Cross Price Elasticity of Demand
If the cross price elasticity is equal to:
The good is classified as:
Positive
Substitutes
Negative
Complements
Zero
Independent
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47. Some Examples Item Prego Ragu Hunt’s -2.5502 .8103 .3918 .5100 -2.0610
.1381
1.0293
.5349
Values in red along
the diagonal are own
price elasticities…
Page 80

48. Some Examples Item Prego Ragu Hunt’s -2.5502 .8103 .3918 .5100 -2.0610
.1381
1.0293
.5349
Values off the diagonal are all positive, indicating these products are substitutes as prices change…
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49. Some Examples Item Prego Ragu Hunt’s -2.5502 .8103 .3918 .5100 -2.0610
.1381
1.0293
.5349
An increase in the price of
Ragu Spaghetti Sauce has a
bigger impact on Hunt’s
Spaghetti Sauce than vice
versa.
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50. Some Examples Item Prego Ragu Hunt’s -2.5502 .8103 .3918 .5100 -2.0610
.1381
1.0293
.5349
A 10% increase in the price of
Ragu Spaghetti Sauce increases
the demand for Hunt’s Spaghetti Sauce by 5.349%…..
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51. Some Examples Item Prego Ragu Hunt’s -2.5502 .8103 .3918 .5100 -2.0610
.1381
1.0293
.5349
But…a 10% increase in the price of
Hunt’s Spaghetti Sauce increases
the demand for Ragu Spaghetti Sauce by only 1.381%…..
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52. Example
1. The cross-price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60.
If the price of hamburger buns rises by 5 percent, what impact will that have on hamburger consumption?
What is the demand relationship between these products?

53. The Answer
1. The cross-price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60.
If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ____ - 3% ______
Solution:
-.60 = %QH  %PHB
-.60 = %QH  3
%QH = 3  (-.60) = – 3%

54. The Answer
1. The cross-price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60.
If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ___ - 3% _____
What is the demand relationship between these products?

55. The Answer
1. The cross-price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60.
If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ___ - 3% _____
What is the demand relationship between these products?
These two products are complements as evidenced by the negative sign on this cross-price elasticity.

56. Another Example
2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross-price elasticity for Pepsi with respect to the price of Coca Cola is 0.70.
If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption?
b. What is the demand relationship between these products?

57. The Answer
2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross-price elasticity for Pepsi with respect to the price of Coca Cola is 0.70.
If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption?
Solution:
.70 = %QPepsi  %PCoke
.70 = %QPepsi  5
%QPepsi=5*.7=3.5%
New quantity sold = 1,000  = 1,035
New value of sales = 1,035  $3.00 = $3,105

58. The Answer
2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross-price elasticity for Pepsi with respect to the price of Coca Cola is 0.70.
If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? __35 six-packs or $105 per day__
What is the demand relationship between these products?

59. The Answer
2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross-price elasticity for Pepsi with respect to the price of Coca Cola is 0.70.
If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? __35 six-packs or $105 per day__
What is the demand relationship between these products?
The products are substitutes as evidenced by the positive sign on this cross-price elasticity!

60. Price Flexibility of Demand

61. Price Flexibility
We earlier said that the price flexibility is the reciprocal of the own-price elasticity. If the calculated elasticty is , then the flexibility would be

62. Price Flexibility
We earlier said that the price flexibility is the reciprocal of the own-price elasticity. If the calculated elasticty is , then the flexibility would be
This is a useful concept to producers when forming expectations for the current year. If the USDA projects an additional 2% of supply will likely come on the market, then producers know the price will likely drop by 8%, or:
%Price = x %Quantity
= x (+2%)
= - 8%
If supply increases by 2%, price would fall by 8%!

63. Price Flexibility
We earlier said that the price flexibility is the reciprocal of the own-price elasticity. If the calculated elasticty is , then the flexibility would be
This is a useful concept to producers when forming expectations for the current year. If the USDA projects an additional 2% of supply will likely come on the market, then producers know the price will likely drop by 8%, or:
%Price = x %Quantity
= x (+2%)
= - 8%
If supply increases by 2%, price would fall by 8%!
Note: make sure you use the negative sign for both the elasticity and the flexibility.

64. Revenue Implications Own-price elasticity is: Increase in supply will:
Decrease in supply will:
Elastic
Increase revenue
Decrease revenue
Unitary elastic
Not change revenue
Inelastic
Characteristic of agriculture
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65. Changing Price Response Over Time
Short run effects
Long run effects
Over time, consumers respond in
greater numbers. This is referred
to as a recognition lag…
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66. Ag’s Inelastic Demand Curve
Price a Pb
A small increase in supply
will cause the price of Ag
products to fall sharply.
This situation explains why major
program crops receive
subsidies from the federal
government. Pa b
Increase in
supply
Qb Qa
Quantity

67. Inelastic Demand Curve
Price
Price a a Pb Pb
While subsidies increase the
costs of government
programs and hence
budget deficits, remember
consumers benefit from
cheaper food costs. Pa Pa b b
Qb Qa
Qb Qa
Quantity

68. In Summary… Know how to interpret all three elasticities
Know how to interpret a price flexibility
Understand revenue implications for producers if prices are cut (raised)
Understand the welfare implications for consumers if prices are cut (raised)
Know what causes movement along versus shifts the demand curve

69. Chapter 6 starts a series of chapters that culminates in a market supply curve for food and fiber products….