agec142-m5-chapter-5.pptx

CHAPTER 5 MEASUREMENT AND INTERPRETATION OF ELASTICITIES “Facts do not cease to exist because they are ignored.” - Aldous Huxley “The only thing necessary for the triumph of evil is for good people to do nothing.” - Edmund Burke Discussion Topics in Chapter 5 Own-price elast...

CHAPTER 5 MEASUREMENT AND INTERPRETATION OF ELASTICITIES “Facts do not cease to exist because they are ignored.” - Aldous Huxley “The only thing necessary for the triumph of evil is for good people to do nothing.” - Edmund Burke Discussion Topics in Chapter 5 Own-price elasticity of demand Income elasticity of demand Cross-price elasticity of demand Other general properties Applicability of demand elasticities Elasticity Tantamount to Sensitivity Alfred Marshall  Key Concepts Own-price elasticity = %Qbeef / %Pbeef Income elasticity = %Qbeef / %Income Cross-price elasticity = %Qbeef / %Pchicken Arc elasticity = range along the demand curve Point elasticity = point on the demand curve Own-price flexibility = reciprocal of own-price elasticity Own-Price Elasticity of Demand Own-Price Elasticity of Demand Own- Percentage change in quantity price = elasticity Percentage change in price of demand Arc Arc Elasticity Elasticity Approach Approach Page 75  Own-Price Elasticity of Demand Own-price elasticity Percentage change in quantity = of demand Percentage change in price Arc elasticity Own-price elasticity = [QP] x [PQ] Equation Equation5.3 5.3 of demand where: P = (Pa + Pb) 2; The Thesubscript subscript“a” “a”here hereagain again Q = (Qa + Qb) 2; stands standsfor for“after” “after”while while“b” “b” stands for “before” stands for “before” Q = (Qa – Qb); and P = (Pa – Pb) Page 76  Own-Price Elasticity of Demand Own-price Percentage change in quantity elasticity = of demand Percentage change in price Arc elasticity The The“bar” “bar”over overthe thePPand and QQvariables variablesindicates indicatesan an Own-price average averageor ormidpoint. midpoint. elasticity = [QP] x [PQ] of demand where: P = (Pa + Pb) 2; The Thesubscript subscript“a” “a”here hereagain again Q = (Qa + Qb) 2; stands standsfor for“after” “after”while while“b” “b” stands for “before” stands for “before” Q = (Qa – Qb); and P = (Pa – Pb) Page 76 Own-Price Elasticity of Demand Own-price Percentage change in quantity elasticity = of demand Percentage change in price Specific Specificrange range on oncurve curve Arc elasticity Pb Own-price Pa elasticity = [QP] x [PQ] of demand where: Qb Qa P = (Pa + Pb) 2; The Thesubscript subscript“a” “a”here hereagain again Q = (Qa + Qb) 2; stands standsfor for“after” “after”while while“b” “b” stands for “before” stands for “before” Q = (Qa – Qb); and P = (Pa – Pb) Page 76 Interpreting the Own-Price Elasticity of Demand If the magnitude of Demand is said to % in the elasticity (in be: quantity is: absolute value) is: Greater than Greater than % in price 1.0 Elastic Same as % Equal to 1.0 Unitary elastic in price Less than % Less than 1.0 Inelastic in price Page 77 Demand Curves Come in a Variety of Shapes P Q Demand Curves Come in a Variety of Shapes P Perfectlyinelastic Perfectly inelastic Perfectlyelastic Perfectly elastic Q Page 77 Demand Curves Come in a Variety of Shapes P Inelastic Inelastic Elastic Elastic Q Demand Curves Come in a Variety of Shapes P Elastic Elasticwhere where%Q %Q>>%P %P Unitary UnitaryElastic Elasticwhere where%Q %Q==%P %P Inelastic Inelasticwhere where %Q %Q