1. ELASTICITY How quantity demanded or supplied changes with changes in price

2. Determinants of Price Elasticity of Demand Necessities versus Non-necessities Availability of Close Substitutes Definition of the Market Time Horizon

3. Price Elasticity of Demand

4. How to calculate the Price Elasticity of Demand i = initial and f = final

5. Example If the price of a unit of the good increases from $4 to $5 and the amount you buy falls from 100 to 50 units/week then your elasticity of demand would be calculated as:

6. How to Interpret Elasticity A price elasticity of –2 means that: if price increases by 1%, quantity demanded decreases by 2%.

7. Unit Elastic Demand: Elasticity equals -1 Quantity Price $5 A 25% increase in price... Demand 75...leads to a 25% decrease in quantity demanded. 100 $4 Ed = %dQ %dP -.25.25 = -1

8. Elastic Demand: Elasticity is greater than –1 Quantity Price 价格 $5 A 25% increase in price... Demand 50...leads to a 50% decrease in quantity demanded. 100 $4 Ed = %dQ %dP = -.50.25 = -2

9. Inelastic Demand: Elasticity is less than –1 Quantity Price $4 $5 A 25% increase in price... Demand 90...leads to a 10% decrease in quantity demanded. 100 Ed = %dQ %dP -.10.25 = -.4

10. Elasticity and Total Revenue: Inelastic demand Quantity Price $4 $5 A 25% increase in price... Demand 100 90...leads to a 10% decrease in quantity demanded. P   Revenue increases Revenue = $400 Revenue = $450

11. Elasticity and Total Revenue: Elastic demand Quantity Price 价格 $4 $5 A 25% increase in price... Demand 100 50...leads to a 50% decrease in quantity demanded. P  Revenue decreases Revenue = $400 Revenue = $250

12. Crude Oil Prices $/barrel Nominal $ Inflation-adjusted 2011 US$

13. Supply: Crude Oil Production 000s barrels/day

14. Estimating Demand Elasticity for Oil 1979-80 Year 1979 1980 Price $/barrel $20 $30 Quantity Barrels/day (millions) 64 56

15. and a proportionately smaller decrease (12.5%) in quantity sold. Effect of Decrease in Supply in Oil Market with Inelastic Demand 30 Barrels/day (millions) 560 $/barrel When demand is inelastic, a decrease in supply... Demand S2S2 S1S1 20 64 leads to a large increase in price (50%) Revenue= $1280 Revenue = $1680

16. and a proportionately larger decrease (22%) in quantity sold. Effect of Decrease in Supply in Oil Market with Elastic Demand 22 Barrels/day (millions) 500 $/barrel When demand is elastic, a decrease in supply... Demand S2S2 S1S1 20 64 leads to a small increase in price (10%) Revenue = $1280 Revenue = $1100

17. and a proportionately smaller increase (10%) in quantity sold. Effect of Increase in Supply in Wheat Market with Inelastic Demand 3 Bushels per day (millions) 3000 $/bushel When demand is inelastic,an increase in supply... Demand S1S1 S2S2 2 330 leads to a large decrease in price (50%) Revenue= $900 Revenue = $660

18. Elastic Supply Elasticity is greater than 1 Quantity Price 4 $5 A 25% increase in price... 200 100 Supply...leads to a 100% increase in quantity supplied. Es = %dQ %dP = 1.00.25 = 4

19. Inelastic Supply Elasticity is less than 1 Quantity Price 4 $5 A 25% increase in price... 110 100 Supply...leads to a 10% increase in quantity supplied. Es = %dQ %dP =.10.25 = 0.4