Kinh tế học vĩ mô - Chapter 6: Describing demand and supply: Elasticities

Describing Demand and Supply: ElasticitiesChapter 6The Concept of Elasticity Elasticity is a measure of the responsiveness of one variable to a change in another.The most commonly used elasticity concept is price elasticity of demand.Price Elasticity The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.Things to Note About ElasticityPrice elasticity of demand is always negative because price and quantity demanded are inversely related—when price rises, quantity demanded falls, and vice versa.Things to Note About ElasticityEconomists have developed a convention and talk about price elasticity of demand as an absolute value of the number.Thus, price elasticity of demand is reported as if it were positive.Classifying Demand as Elastic or InelasticIt is helpful to classify demand by relative responsiveness as elastic or inelastic.Elastic DemandFor elastic points on curves, the percentage change in quantity is greater than the percentage change in price, in absolute value.D > 1Elastic DemandCommon sense tells us that an elastic demand means that quantity changes by a greater percentage than the percentage change in price, in absolute value. Inelastic Demand For inelastic points on curves, the percentage change in quantity is less than the percentage change in price, in absolute value.D 1Interpreting elasticitiesWe know by the law of demand that consumers buy less as price risesPrice elasticity of demand tells us if whether consumers reduce their purchases by a lot (elastic demand) or a little (inelastic demand).Interpreting Price Elasticity of Demand, Table 6-1, p 141 DDescription of demandInterpretationD=¥Perfectly elasticQuantity responds enormously to changes in priceD>1ElasticConsumers are responsive to price changesD=1Unit elasticPercent change in price and quantity are equalD 1), a rise in price lowers total revenue.Price and total revenue move in opposite directions.Price Elasticity of Demand and Total RevenueIf demand is unit elastic ( D = 1), a rise in price leaves total revenue unchanged.Price Elasticity of Demand and Total RevenueIf demand is inelastic ( D 1Quantity$1086420123456789Elasticity and Total Revenue Fig. 6-5a, p 144CBFELost revenue Gained revenueAPriceInelastic Demand D 1  D = 1Inelastic range  D 0SubstituteGoodsPYQXXY < 0ComplementaryGoodsPY QXXY = 0Unrelated GoodsPY  QX=0P0D0D1P018Quantity25Shift due to rise in income Calculating Income and Cross-Price Elasticities,Fig 6-7a, p 151Price=6.5Calculating Income and Cross-Price Elasticities,Fig 6-7a, p 151 P0P03Quantity of ketchup4Shift due to rise in priceof hot dogsD1D0Price of ketchupXY= -0.7Price Elasticity of SupplyMeasures the responsiveness of firms to a change in the price of their product.Price Elasticity of SupplyThe price elasticity of supply is calculated as the percent change in quantity supplied over the percent change in price.Inelastic SupplyCommon sense tells us that an inelastic supply means that the percent change in quantity is less than the percentage change in price.Elastic SupplyAn elastic supply means that quantity supplied changes by a larger percent than the percent change in price.Substitution and SupplyThe longer the time period considered, the more elastic the supply.Substitution and SupplyThe reasoning is the same as for demand.In the long run there are more alternatives so it is easier (less costly) for suppliers to change and produce other goods.Substitution and SupplyEconomists distinguish three time periods relevant to supply:The instantaneous period.The short run.The long run.Substitution and SupplyIn the instantaneous period, quantity supplied is fixed so supply is perfectly inelastic.This supply is sometimes called the momentary supply.Substitution and SupplyIn the short run, some substitution is possible, so the short-run supply curve is somewhat elastic.Substitution and SupplyIn the long run, significant substitution is possible; the supply curve becomes very elastic.Substitution and SupplyAn additional factor to consider in determining elasticity of supply:One must take into account how easy or how difficult it is to produce more of the same good. The easier it is to produce additional units, the more elastic the supply.Empirical Estimates of ElasticitiesThere are fewer empirical measurements of elasticity of supply than there are of demand elasticities.Empirical Estimates of ElasticitiesOne does find empirical measurements of elasticity of supply in factor markets, such as the market for labour services.Empirical Estimates of ElasticitiesOther areas in which elasticities of supply are estimated are agricultural and raw materials markets.In these markets, economists have generally found that the short-run supplies are highly inelastic, and that the long-run supplies are highly elastic.Effects of Shifts in Supply on Price and QuantityAn example of the importance of elasticities of demand and supply can be illustrated by the example of the world market for oilEffects of Shifts in Supply on Price and QuantityIf oil supply decreases, the world prices will rise sharply if the demand for oil is inelasticOil prices will not be affected a lot if demand is elasticEffects of Shifts in Supply on Price and Quantity, Fig 6-8a, p 154Inelastic Supply and Inelastic DemandP1P0PriceQuantityS1S0Q1Q0DemandEffects of Shifts in Supply on Price and Quantity, Fig 6-8b, p 154Inelastic Supply and Elastic DemandP1P0DemandPriceQuantityS1S0Q1Q0Describing Supply and Demand: ElasticitiesEnd of Chapter 6