1. Elasticity

2. Elasticity (film) Price elasticity of demand =
A measure of the responsiveness of one variable (usually quantity demanded or supplied) to a change in another variable
Most commonly used elasticity: price elasticity of demand, defined as:
Price elasticity of demand =

3. Price elasticity of demand
usually takes negative values
when price grows, quantity demanded decreases
when price decreases, quantity demanded increases
the exceptions:
The Veblen effect - some types of high-status goods, such as diamonds or luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable.

4. exception cont. Giffen good
the classic example given by Marshall is staple foods of inferior quality,
whose demand is driven by poverty, that makes their purchasers unable to afford superior foodstuffs.
As the price of the cheap staple food rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.
Marshall wrote in the 1895 edition of Principles of Economics:
As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.

5. Price elasticity of demand
Demand is said to be:
elastic when Ed < -1,
unit elastic when Ed = -1, and
inelastic when Ed >-1.

6. Perfectly elastic demand
Even small change of price results decreasing of demand till zero

7. Perfectly inelastic demand
Customers buy the same amount of good, regardless of good’s price

8. Elasticity & slope (film)
a price increase from $1 to $2 represents a 100% increase in price,
a price increase from $2 to $3 represents a 50% increase in price,
a price increase from $10 to $11 represents a 10% increase in price.
Notice that, even though the price increases by $1 in each case, the percentage change in price becomes smaller when the starting value is larger.

9. Elasticity along a linear demand curve

10. Elasticity along a linear demand curve

11. Elasticity measure
where: ΔQ - change of quantity demanded Q – quantity demanded before price change ΔP – change of price P – price before change

12. Example
Suppose that quantity demanded falls from 60 to 40 when the price rises from $3 to $5. The price elasticity of demand equls…
In this interval, demand is inelastic (since elasticity >- 1).

13. Elasticity and total revenue
Total revenue = price times quantity
What happens to total revenue if the price rises?

14. Elasticity and TR (cont.)
Price elasticity of demand =
A reduction in price will lead to:
an increase in TR when demand is elastic.
a decrease in TR when demand is inelastic.
an unchanged level of total revenue when demand is unit elastic.

15. Elasticity and TR (cont.) (film)

16. Price discrimination
different customers are charged different prices for the same product, due to differences in price elasticity of demand
higher prices for those customers who have the most inelastic demand
lower prices for those customers who have a more elastic demand.

17. Examples of Price discrimination
Theatres usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age category, with the highest charge going to the adult population.
Some companies, such as firms selling alcoholic beverages, produce similar products but try to promote one as a prestige brand with a much higher price.

18. Determinants of price elasticity
Price elasticity of demand is relatively high when:
close substitutes are available,
the good or service is a large share of the consumer's budget,
a longer time period is considered,
the customers are rather poor.

19. Determinants of price elasticity
Price elasticity of demand is relatively low when:
There are no close substitutes (e.g. electricity, water)
Goods are necessities
Customers are rather rich
The good or service is a small share of the consumer's budget

20. Cross-price elasticity of demand
The cross-price elasticity of demand between two goods j and k is defined as:

21. Cross-price elasticity (cont.)
cross-price elasticity is positive if and only if the goods are substitutes
cross-price elasticity is negative if and only if the goods are complements.

22. Income elasticity of demand (film)
A good is a normal good if income elasticity > 0.
A good is an inferior good if income elasticity < 0.

23. Income elasticity of demand
A good is a luxury good if income elasticity > 1.
A good is a necessity good if income elasticity < 1.

24. Price elasticity of supply

25. Perfectly inelastic supply
Example: land

26. Perfectly elastic supply
Example: perfect competition

27. Determinants of supply elasticity
short run - period of time in which capital is fixed
all inputs are variable in the long run
supply will be more elastic in the long run than in the short run since firms can expand or contract their capital in the long run.

28. Math dictionary równanie – equation
układ równań - simultaneous equations
ułamek – fraction
ułamek piętrowy – compound fraction
malejąca (rosnąca) funkcja – decreasing (increasing) function
funkcja liniowa – linear function
iloraz – quotient
iloczyn – product
różnica – difference
suma – sum
sumowanie – summation
dodatni – positive
ujemny – negative
licznik – numerator
mianownik - denominator

29. Bibliography http://www.oswego.edu/~kane/eco101.htm
Czarny B. „Podstawy Ekonomii”, 2002
Wood, John C. (1993). Thorstein Veblen: Critical Assessments, 352. London
Alfred Marshall, Principles of Economics Bk.III,Ch.VI in paragraph III.VI.17

30. Discussion topics:
Give some examples of goods with inelastic demand? Describe why demand is inelastic for these goods.
Give some examples of goods with very elastic demand? Describe why demand is very elastic for these goods.
What is price discrimination. Give examples.
What is the difference between normal goods, luxury goods and inferior goods? Give examples.
Make a proof that at the level of price at which Epd=-1 the TR takes maximum value. Assume linear relationship between P and Q.
What is the inluence of price comparison services on price elasticity of demand in e-commerce. Give examples.
Explain why the long run price elasticities of supply are larger in magnitude when compared with the short-run price elasticities. Give examples.