Kinh tế học - Chapter 4: Elasticities

Chapter 4Elasticities McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.1Learning ObjectivesWhat is price elasticity of demand?What are categories of demand elasticity and what factors influence them?What is the relationship between demand elasticity and total revenue?What is income elasticity of demand?What is cross elasticity of demand?What is price elasticity of supply?What are categories of supply elasticity and what factors influence them?4-22Price Elasticity of DemandPrice elasticity of demand measures consumers’ responsiveness to price changes. How much quantity demanded will change if price changes. Ignore the negative sign since it’s always there.4-33Categories of Demand Elasticity If price elasticity of demand >1:% change in quantity demanded > % change in priceElastic demand If price elasticity of demand 1.Point APoint B$8$7220100PriceQuantityDemand 4-55Inelastic Demand CurvePoint APoint BQuantity100110$10$4PriceA large percentage change in price:A small percentage change in quantity.The price elasticity of demand between Point A and Point B is low.Price elasticity of demand 1.% change in quantity supplied > % change in price.Inelastic supply = quantity supplied is relatively unresponsive to price changes. If price elasticity of supply < 1.% change in quantity supplied < % change in price. Unit elastic supply.If price elasticity of supply = 1.% change in quantity supplied = % change in price.4-2525Behind Price Elasticity of Supply Costs:Low costs result in relatively high price elasticity of supply. Capacity:Additional productive capacity makes increases price elasticity of supply. Specialized inputs:Goods that need specialized inputs for production have lower price elasticity of supply in the short term.4-2626Behind Price Elasticity of Supply Government permission:Need to obtain legal permission to expand operations reduces firm’s price elasticity of supply. Ability to fire workers:Not being able to fire workers reduces firm’s price elasticity of supply.4-2727Behind Price Elasticity of Supply Time:Price elasticity of supply is greater in the long run than in the short term. Longer time offers firms flexibility and possibility of innovations.4-2828Do You Know?When is income elasticity of demand negative? Income elasticity of demand is negative for inferior goods i.e. Goods which consumers buy less with higher income.What does the cross elasticity of demand measure? Cross elasticity of demand measures how the change in price of one good impacts the demand for another good.What is the sign of price elasticity of supply and why does it have this sign? Supply elasticity is positive since as price increases, quantity supplied rises and as price decreases, quantity supplied falls.4-2929Summary Price elasticity of demand measures how quantity demanded responds to price changes.Elastic demand = consumers very responsive to price changes.Inelastic demand = consumers not responsive to price changes.Unit elastic demand = quantity demanded changes by the same percentage as change in price.Factors that influence demand elasticity: availability of substitutes, product definition, share of income spent on the good, necessities vs. luxuries, time and strong complements.Effect of change in price on total revenue depends on the category of demand elasticity.4-3030Summary Price elasticity of income measures how quantity demanded responds to income changes.Cross elasticity of demand measures how the change in price of one good impacts the demand for another good.Price elasticity of supply measures responsiveness of quantity supplied to price changes.Elastic supply = quantity supplied very responsive to price changes.Inelastic demand = quantity supplied not responsive to price changes.Unit elastic demand = quantity supplied changes by the same percentage as change in price.Factors that influence supply elasticity: costs, capacity, time, flexibility of doing business.4-3131Coming up Analyzing policies with market forces of supply and demand.4-3232Appendix: calculating demand elasticityPrice elasticity of demand==Where Q1= new quantity, Q0= old quantity P1= new price, P0= old price4-3333