1. More On Elasticity Measures Lecture 11
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
March 6, 2017

2. Announcements-micro Spring 2018
All Prelim 1 Testing Locations – Please Check Cornell's Web pages for Building Codes and Building Locations
Tuesday at 7:30 evening prelim (please arrive no latter than 7:15)
Last Names starting with A-P in STL185 (Statler Aud)
Last Names starting with Q-S in STL196
Last Names starting with T-Z in STL265
Tuesday people w/accommodation letters start at 5:00pm (1110 & 1120)
URH 202
Tuesday early sitters start at 5:00pm (1110 & 1120)
RCK 122
Wednesday regular makeup start at 3:00pm (1110 & 1120)
BKL 119
Wed-day people w/accommodation letters start at 2:00pm (1110 & 1120)
URH G22
Don’t forget to submit MEL Quiz by 11pm TONGIHT
We will have class on Wednesday.
Wednesday’s class will be added to the “Class Add-on” number for people who can’t make it.
However, if you do come you will get the i>clicker point too!

3. Own Price Elasticity of Demand & Total Expenditures (TE)
Suppose: Current toll for the George Washington Bridge is $15/trip.
Suppose: The quantity demanded at $15/trip is 1,000 trips/hour.
TE on trips per hour = $15,000/hour
i>clicker question If the own price elasticity of demand for bridge trips is known to be equal to -2.0, then what is the effect on TE of a 10% toll increase?
A. TE increase
B. TE stay the same
C. TE decrease
A 10% toll increase means the price is now $16.50 per trip.
If η = -2, a toll increase of 10% implies a 20% decline in the quantity demanded.
If there is a 20% decline in trips, number of trips falls to 800 trips/hour.
TE are now only $13,200/hour (= 800 x $16.50), so TE decreased!

4. Own Price Elasticity of Demand & Total Expenditures
What happens to total expenditures (TE) made by buyers in a market when market price increases?
Note: TE = PD•QD
PD↑ tends to increase TE.
QD↓ tends to decreases TE.
So what happens to TE?
Knowing own price elasticity will help!
If demand is price ELASTIC, then when PD↑  TE ↓
Why?
If demand is price INELASTIC, then when PD↑  TE ↑
On you own: reverse this argument to determine the relationship between total expenditure and elasticity when you consider a price decrease!
Price D
Perfectly Inelastic Demand (elasticity = 0)
Quantity

5. Own Price Elasticity of Demand & Total Expenditure with Linear Demand
$TE=P•Q
Price
Price elastic
Demand
Price inelastic
Quantity
Quantity
Starting at the “top” of the demand curve, where demand is price elastic, as price falls, and quantity demanded rises, total expenditures rise, but increase at a decreasing rate.
At the midpoint, where demand is unit elastic, total expenditures will be at their maximum value.
As you continue down the demand curve, where demand is now price inelastic, as price falls, and quantity demanded rises, total expenditures fall.

6. Own Price Elasticity of Demand & Total Expenditure with Linear Demand
$TE=P•Q
Price
Price elastic
Demand
Price inelastic
Quantity
Quantity

7. Example: Demand Function, Demand Curve & Own Price Elasticity of Demand
Suppose you know the demand function for compact disc players (X) is:
QDX = (T&P)(Pop) + 3I – 2PCD + 3PB – (5,145/T&P)PX
Now… to go from the demand function to the demand curve, plug in values for everything BUT PX
So suppose: T&P=7; Pop=1,000; I=5,000; PCD=9; PB=15
You get:
Now find own price elasticity of demand at PX=$7

8. Example: Demand Function, Demand Curve & Own Price Elasticity of Demand
Suppose you know the demand function for compact disc players (X) is:
QDX = (T&P)(Pop) + 3I – 2PCD + 3PB – (5,145/T&P)PX
Now… to go from the demand function to the demand curve, plug in values for everything BUT PX
So suppose: T&P=7; Pop=1,000; I=5,000; PCD=9; PB=15
You get:
Now find own price elasticity of demand at PX=$7

9. END OF MATERIAL FOR PRELIM 1
WHEW!!
HINTS:
DON’T pull an “all-nighter”.
READ questions carefully. Highlight or underline each important piece of information.
For the multiple choice: Cover up all the answers and “do” the problem based on the narrative first, then your work will lead you to the correct answer.
For “work” problem: Draw graphs big enough and carefully enough to make it so they can “show” you the way.
Always label BOTH axes right away, it helps remind you of what goes where and what you are doing.
Label any items you put into the graph (like D for demand and S for supply).
Use a contrasting color to help see things.
TRY each problem – at least do something so there is some chance that you might get partial credit for what you did.
Don’t spin your wheels too long on any one problem. Give it your best shot, then move on, then go back to it if there is time.

10. Three Other Elasticities
Cross Price Elasticity of Demand
Income Elasticity of Demand
Own Price Elasticity of Supply

11. The Other Elasticities
Extremely similar formulas are used:
(Midpoint) Arc formula
With discrete data points
Point formula
When you use the slope of the function
Just need to substitute in…
…carefully!

12. The Other Elasticities You Need to Know
Cross Price Elasticity of Demand
(Midpoint) Arc Formula
Point Formula

13. The Other Elasticities You Need to Know
Income Elasticity of Demand
(Midpoint) Arc Formula
Point Formula

14. Example: Demand Function & Income Elasticity of Demand
Suppose you know the demand function for compact disc players (X) is:
QDX = (T&P)(Pop) + 3I – 2PCD + 3PB – (5,145/T&P)PX
Now… plug in values for everything BUT Income (I).
So suppose: T&P=7; Pop=1,000; PCD=9; PB=15; PX=$7
You get:
Now find income elasticity of demand at I=5,000

15. The Other Elasticities You Need to Know
Own Price Elasticity of Supply
(Midpoint) Arc Formula
Point Formula

16. Example: (Midpoint) Arc Calculation of Own Price Elasticity of Supply
Approximate own price supply elasticity between B and A.
At B: QS=9 and PS=5
At A: QS=12 and PS=6
So: % change in QS = (12-9)/((12+9)/2) = 0.286
So: % change in PS = (6-5)/((6+5)/2) = 0.182
So: Own price supply elasticity over the interval ≈ / = 1.57
Nonlinear Supply Curve 12 10 8
Price 6 B A 4 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity

17. Perfectly Inelastic Supply
Supply is perfectly inelastic when a 1% change in the price would result in no change in quantity supplied.
Example: wheat?
At harvest?
Yes.
Across planting seasons?
No.
Price
Quantity
Perfectly Inelastic Supply (elasticity = 0)

18. Perfectly Elastic Supply
Supply is perfectly elastic when a 1% change in the price would result in an infinite change in quantity supplied.
Example: wheat?
Across planting seasons?
Yes.
Price
Quantity
Perfectly Elastic Supply (elasticity = ¥)

19. Determinants of Supply Elasticity
Recall: What is a major determinant of the own price elasticity of demand?
Availability of substitutes in consumption.
So: What is a major determinant of the own price elasticity of supply?
Availability of alternatives in production.

20. Consumer Theory

21. i>clicker question
Prof. Wissink really thinks Saabs are cool cars and she prefers them to Hondas, yet she drives a Honda Fit. This is because
she is not a good shopper.
she does not know how to solve the consumer theory problem.
she does not have enough money to buy a Saab.
All of the above are correct
None of the above are correct