Elasticity. Sherif Khalifa. Sherif Khalifa () Elasticity 1 / 32
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1 Sherif Khalifa Sherif Khalifa () Elasticity 1 / 32
2 Definition Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. Sherif Khalifa () Elasticity 2 / 32
3 rice Elasticity of Demand Definition The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. rice elasticity of demand = % change in quantity demanded % change in price Measures how willing consumers are to move away from the goods as its price increases. Demand is elastic if the quantity demanded responds substantially to changes in the price. Demand is inelastic if the quantity demanded responds slightly to changes in the price. Sherif Khalifa () Elasticity 3 / 32
4 rice Elasticity of Demand Suppose that a 1% increase in the price of ice cream cone causes the amount of ice cream you buy to fall by 2%. rice elasticity of demand = 2% 1% = 2 Sherif Khalifa () Elasticity 4 / 32
5 rice Elasticity of Demand Goods with close substitutes have more elastic demand because it is easier for consumers to switch from that good to others. Necessities have inelastic demands, whereas luxuries have elastic demands. Narrowly defined goods have more elastic demand than broadly defined goods because it is easier to find close substitutes for narrowly defined goods. Goods tend to have more elastic demand over longer time horizons. Sherif Khalifa () Elasticity 5 / 32
6 rice Elasticity of Demand Demand is elastic when elasticity>1. Demand is inelastic when elasticity<1. Demand is unitary elastic if elasticity=1. The flatter the demand curve that passes through a given point, the greater the price elasticity of demand. The steeper the demand curve that passes through a given point, the smaller the price elasticity of demand. Sherif Khalifa () Elasticity 6 / 32
7 rice Elasticity of Demand D 1 2 falls by 1% 1 changes by % Sherif Khalifa () Elasticity 7 / 32
8 rice Elasticity of Demand 1 falls by 1% D rises less than 1% Sherif Khalifa () Elasticity 8 / 32
9 rice Elasticity of Demand 1 2 D falls by 1% 1 2 rises by 1% Sherif Khalifa () Elasticity 9 / 32
10 rice Elasticity of Demand 1 2 D falls by 1% 1 2 rises more than 1% Sherif Khalifa () Elasticity 1 / 32
11 rice Elasticity of Demand 2 = 1 D changes by % 1 2 changes by any % Sherif Khalifa () Elasticity 11 / 32
12 rice Elasticity of Demand x x E x, x x x Sherif Khalifa () Elasticity 12 / 32
13 rice Elasticity of Demand 4 TR 8 Sherif Khalifa () Elasticity 13 / 32
14 rice Elasticity of Demand 4 35 TR Sherif Khalifa () Elasticity 14 / 32
15 rice Elasticity of Demand TR Sherif Khalifa () Elasticity 15 / 32
16 rice Elasticity of Demand TR Sherif Khalifa () Elasticity 16 / 32
17 rice Elasticity of Demand TR Sherif Khalifa () Elasticity 17 / 32
18 rice Elasticity of Demand TR Sherif Khalifa () Elasticity 18 / 32
19 rice Elasticity of Demand TR Sherif Khalifa () Elasticity 19 / 32
20 rice Elasticity of Demand TR Sherif Khalifa () Elasticity 2 / 32
21 rice Elasticity of Demand TR 8 75 Elastic Unitary Elastic Inelastic Sherif Khalifa () Elasticity 21 / 32
22 Income Elasticity of Demand Definition Income elasticity of demand measures how the quantity demanded changes as consumer income changes. Income elasticity of demand = % change in quantity demanded % change in income Normal goods have positive income elasticities. Inferior goods have negative income elasticities. Necessities tend to have small income elasticities. Luxuries tend to have large income elasticities. Sherif Khalifa () Elasticity 22 / 32
23 Income Elasticity of Demand Suppose that a 5% increase in the income causes the amount of ice cream you buy to increase by 15%. Income elasticity of demand = 15% 5% = 3 Sherif Khalifa () Elasticity 23 / 32
24 Cross rice Elasticity of Demand Definition Cross price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes. = Cross price elasticity of demand % change in quantity demanded of good 1 % change in the price of good 2 Substitutes have positive cross price elasticities. Complements have negative cross price elasticities. Sherif Khalifa () Elasticity 24 / 32
25 Cross rice Elasticity of Demand Suppose that a 1% increase in the price of pizza causes the amount of burgers you buy to increase by 5%. Cross price elasticity of demand = 5% 1% = 1 2 Sherif Khalifa () Elasticity 25 / 32
26 Cross rice Elasticity of Demand Suppose that a 12% increase in the price of ketchup causes the amount of burgers you buy to decrease by 3%. Cross price elasticity of demand = 3% 12% = 1 4 Sherif Khalifa () Elasticity 26 / 32
27 rice Elasticity of Supply Definition rice elasticity of supply measures how much the quantity supplied of a good responds to a change in the price of that good. rice elasticity of supply = % change in quantity supplied % change in price Suppose an increase in the price of milk by 1% increases the amount that dairy farmers produce by 2%. rice elasticity of supply = 2% 1% = 2 Sherif Khalifa () Elasticity 27 / 32
28 rice Elasticity of Supply S 2 1 rises by 1% 1 changes by % Sherif Khalifa () Elasticity 28 / 32
29 rice Elasticity of Supply S 2 1 rises by 1% 1 2 rises less than 1% Sherif Khalifa () Elasticity 29 / 32
30 rice Elasticity of Supply S 2 1 rises by 1% 1 2 rises by 1% Sherif Khalifa () Elasticity 3 / 32
31 rice Elasticity of Supply S 2 1 rises by 1% 1 2 rises more than 1% Sherif Khalifa () Elasticity 31 / 32
32 rice Elasticity of Supply 2 = 1 S changes by % 1 2 changes by any % Sherif Khalifa () Elasticity 32 / 32
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