1. Managerial Economics-Charles W. Upton Arc Elasticity  “eta”

2. Elasticity Defining Arc Elasticity P Q 50 100 20 60 64 18

3. Elasticity Defining Arc Elasticity P Q 50 100 20 60 64 18 Where: Percent change is measured as percent of average value

4. Elasticity Defining Arc Elasticity P Q 50 100 20 60 64 18 When P changes from 20 to 18,  p = -2 Average value of P = 19 The % change is thus -2/19

5. Elasticity The Formula P Q 50 100 20 60 64 18

6. Elasticity The Formula P Q 50 100 20 60 64 18

7. Elasticity The Formula P Q 50 100 20 60 64 18

8. Elasticity The Formula P Q 50 100 20 60 64 18

9. Elasticity The Formula P Q 50 100 20 60 64 18

10. Elasticity An Example P Q 50 100 20 60 64 18 Compute the arc elasticity when P changes from 20 to 18

11. Elasticity An Example P Q 50 100 20 60 64 18

12. Elasticity An Example P Q 50 100 20 60 64 18

13. Elasticity An Example P Q 50 100 20 60 64 18  = -0.6129

14. Elasticity Reverse the Calculation P Q 50 100 20 60 64 18 Compute the arc elasticity when P changes from 18 to 20

15. Elasticity Reverse the Calculation P Q 50 100 20 60 64 18  = -0.6129

16. Elasticity Second Example P Q 50 100 20 60 64 18 Compute the arc elasticity when P changes from 10 to 20

17. Elasticity Second Example P Q 50 100 20 60 64 18  = -4/7

18. Elasticity Arc Elasticity and Tables 15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity

19. Elasticity Arc Elasticity and Tables 15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity

20. Elasticity Arc Elasticity and Tables 15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity

21. Elasticity Arc Elasticity and Tables 15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity

22. Elasticity Arc Elasticity and Tables 15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity Note that we never said which price came first.

23. Elasticity Which method is best? The concept of elasticity is defined without reference to any one method of calculation.

24. Elasticity Which method is best? The concept of elasticity is defined without reference to any one method of calculation. There are occasions when the point elasticity formula is best and there are occasions when the arc elasticity formula is best.

25. Elasticity Which method is best? The concept of elasticity is defined without reference to any one method of calculation. There are occasions when the point elasticity formula is best and there are occasions when the arc elasticity formula is best. In general we tend to use point elasticities in class, because we have the luxury of examples with nice demand curves.

26. Elasticity Extensions to other Elasticities Income elasticities (measuring the responsiveness of demand with respect to changes in income).

27. Elasticity Extensions to other Elasticities Income elasticities (measuring the responsiveness of demand with respect to changes in income). Own price elasticities measuring the responsiveness of demand with respect to changes in the price of the good itself.

28. Elasticity Extensions to other Elasticities Income elasticities (measuring the responsiveness of demand with respect to changes in income). Own price elasticities measuring the responsiveness of demand with respect to changes in the price of the good itself. Cross price elasticities (measuring the responsiveness of demand with respect to the price of other goods).

29. Elasticity End ©2004 Charles W. Upton