Chapter 5 Elasticity and Its Application PDF

Principles of Economics, Ninth Edition N. Gregory Mankiw PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University N. Gregory Mankiw, Principles of Ec...

Principles of Economics, Ninth Edition N. Gregory Mankiw PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 1 posted to a publicly accessible website, in whole or in part.  Chapter 5 Elasticity and Its Application N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 2 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 1 Elasticity – Measure of the responsiveness of quantity demanded or quantity supplied To a change in one of its determinants Price elasticity of demand – How much the quantity demanded of a good responds to a change in the price of that good N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 3 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 2 Price elasticity of demand – Percentage change in quantity demanded divided by the percentage change in price Elastic demand – Quantity demanded responds substantially to changes in price Inelastic demand – Quantity demanded responds only slightly to changes in price N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 4 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 3 Determinants of price elasticity of demand – Availability of close substitutes Goods with close substitutes: more elastic demand – Necessities versus luxuries Necessities: inelastic demand Luxuries: elastic demand N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 5 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 4 Determinants of price elasticity of demand – Definition of the market Narrowly defined markets: more elastic demand – Time horizon Demand is more elastic over longer time horizons N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 6 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 5 Computing the price elasticity of demand – Percentage change in quantity demanded divided by percentage change in price – Use absolute value (drop the minus sign) Midpoint method – Two points: (Q1, P1) and (Q2, P2) (Q2  Q1 )/[(Q2  Q1 )/ 2 ] Price elasticityof demand (P2  P1 )/[(P2  P1 )/ 2 ] N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 7 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 6 Variety of demand curves – Demand is elastic Price elasticity of demand > 1 – Demand is inelastic Price elasticity of demand < 1 – Demand has unit elasticity Price elasticity of demand = 1 N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 8 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 8 Total revenue, TR – Amount paid by buyers and received by sellers of a good – Price of the good times the quantity sold (P × Q) For a price increase – If demand is inelastic, TR increases – If demand is elastic, TR decreases N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 9 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 9 When demand is inelastic (elasticity < 1) – P and TR move in the same direction If P ↑, TR also ↑ When demand is elastic (elasticity > 1) – P and TR move in opposite directions If P ↑, TR ↓ If demand is unit elastic (elasticity = 1) – Total revenue remains constant when the price changes N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 10 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 11 Income elasticity of demand – How much the quantity demanded of a good responds to a change in consumers’ income – Percentage change in quantity demanded Divided by the percentage change in income N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 11 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 12 Normal goods – Positive income elasticity – Necessities Smaller income elasticities – Luxuries Large income elasticities Inferior goods – Negative income elasticities N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 12 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 13 Cross-price elasticity of demand – How much the quantity demanded of one good responds to a change in the price of another good – Percentage change in quantity demanded of the first good Divided by the percentage change in price of the second good N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 13 posted to a publicly accessible website, in whole or in part.  The Elasticity of Demand, Part 14 Substitutes – Goods typically used in place of one another – Positive cross-price elasticity Complements – Goods that are typically used together – Negative cross-price elasticity N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 14 posted to a publicly accessible website, in whole or in part.  The Elasticity of Supply, Part 1 Price elasticity of supply – How much the quantity supplied of a good responds to a change in the price of that good – Percentage change in quantity supplied Divided by the percentage change in price – Depends on the flexibility of sellers to change the amount of the good they produce N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 15 posted to a publicly accessible website, in whole or in part.  The Elasticity of Supply, Part 2 Elastic supply – Quantity supplied responds substantially to changes in the price Inelastic supply – Quantity supplied responds only slightly to changes in the price Determinant of price elasticity of supply – Time period Supply is more elastic in the long run N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 16 posted to a publicly accessible website, in whole or in part.  The Elasticity of Supply, Part 3 Computing price elasticity of supply – Percentage change in quantity supplied divided by percentage change in price – Always positive Midpoint method – Two points: (Q1, P1) and (Q2, P2) (Q2  Q1 ) / [(Q2  Q1 ) / 2 ] Price elasticity of supply  (P2  P1 ) / [(P2  P1 ) / 2 ] N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 17 posted to a publicly accessible website, in whole or in part.  The Elasticity of Supply, Part 4 Variety of supply curves – Supply is unit elastic Price elasticity of supply = 1 – Supply is elastic Price elasticity of supply > 1 – Supply is inelastic Price elasticity of supply < 1 N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 18 posted to a publicly accessible website, in whole or in part.  The Elasticity of Supply, Part 5 Variety of supply curves – Supply is perfectly inelastic Price elasticity of supply = 0 Supply curve is vertical – Supply is perfectly elastic Price elasticity of supply = infinity Supply curve is horizontal N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 19 posted to a publicly accessible website, in whole or in part.