Application Of Elasticity And Its Application

Submitted By shmomes93
Words: 536
Pages: 3
Open Document
Econ 1000C: Intro to Economics 9/19/13

Lecture #5

Elasticity and its applications

Elasticity

Basic idea:
Elasticity measures how much one variable.

Definition:
Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its determinants.

Price of elasticity of demand

Price of elasticity of demand measures how much Qd responds to change in P
Price of elasticity of demand = % change in Qd / % Change in P

Calculating Percentage Changes

Standard method of computing the % change
End value – Start value
P rises 25% Q falls 33%, elasticity = 33/25= 1.33
P falls 20%, rises 50%, 50/20 = 2.50
So, we instead use the midpoint method, End value – Start value/midpoint * 100%

Determinants of Price of Elasticity (PE): Summary

The PE of demand depends on:
The extent to which close substitutes are available
Whether the good is a necessity or a luxury
How broadly or narrowly the good is defined
The time horizon – elasticity is higher in the long run than the short run

Variety of Demand Curves

PE of demand is closely related to the slope of the demand curve
Rule of thumb:
The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity

1. “Inelastic Demand”
2. “Unit Elastic Demand”
3. “Elastic Demand”
4. “Perfectly elastic demand”
5. Elasticity of a Linear Demand Curve, The slope of a linear demand curve is constant, but the elasticity is not.

Price of Elasticity and Total Revenue
Continuing our scenario, if you raise your price from $200 to $250, would your revenue rise or fall?
Revenue = P*Q
A price increase has two effects on revenue
Higher P means more revenue on each unit you sell
But you sell fewer units (Lower Q)
If demand is elastic, then PE of demand > 1
% Change in q > % change in P
When D is elastic a price increase causes revenue to fall

PE of Supply
PE of supply measures how much Qs responds to change in P
PE of supply = % change in Qs / % change in P

Variety of Supply Curves
The slope of the supply curve is closely related to PE of supply
Rule of Thumb:
The flatter
Show More

Related Documents: Application Of Elasticity And Its Application

Price Elasticity And Supply And Demand

Associate Level Material Appendix B Price Elasticity and Supply & Demand Fill in the matrix below and describe how changes in price or quantity of the goods and services affect either supply or demand and the equilibrium price. Use the graphs from your book and the Tomlinson video tutorials as a tool to help you answer questions about the changes in price and quantity |Event |Market affected by event |Shift in supply, demand, or both.…

Words 623 - Pages 3

Essay on Price elasticity

Assessment 2 Price elasticity of demand is defined as a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. (www.investopedia.com). In a most simple way elastic demand means that clients acquire more products or services when prices are lower or less if the prices are higher, or vice versa depending on other factors. There are two types of demand elasticity. 1) Elastic demand or high price elasticity, this happens when the quantity…

Words 1252 - Pages 6

Price Elasticity Essay

5 E’s to Reduce Scarcity The first E of economics is economic growth. Economic growth is the increase in the ability to produce more goods and services. This is caused by new resources, better resources, and better technology. For example if a large amount of oil had been found underneath Harper College that would increase our economic growth because there is an increase in new resources. Having this new resource helps to minimize scarcity. The second E is productive efficiency. Productive efficiency…

Words 427 - Pages 2

price elasticity of supply Essay

PRICE ELASTICITY OF SUPPLY Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change in price. If supply is elastic, producers can increase output without a rise in cost or a time delay If supply is inelastic, firms find it hard to change production in a given time period. Percentage change in quantity supplied divided by the percentage change in price When PES > 1, then supply is price elastic When PES < 1, then supply is price inelastic…

Words 391 - Pages 2

Vocabulary: Supply and Demand and Price Elasticity Essay

2. 'unit elasticity' Demand or supply with a price elasticity coefficient that is equal to one. 3. 'cross elasticity of demand' The ratio of the percentage change in quantity demanded of one good to the percentage change in price of some other good. 4. 'producer surplus' The difference between the actual price producers receive for a product and the minimum acceptable price 5. 'midpoint formula' A method for calculating price elasticity of demand or price elasticity of supply that…

Words 378 - Pages 2

Marketing: Supply and Demand and Price Elasticity Essays

of economic behavior in industries and consumers. Some of the concepts that microeconomics focuses on are market prices and how the supply and demand curve initiates change. Microeconomics also examines mergers and price elasticity which are vital notions important to microeconomic excellence. As decisions are made through microeconomics, both firms and individuals analyze the prices of products and services motivated by demand costs and benefit considerations in a portion of the economy instead…

Words 957 - Pages 4

Coffee Supply, Demand and Price Elasticity Essay

Coffee Supply, Demand, and Price Elasticity Team B: Walelia Naholowa’a, Priscilla Swanson, Delniece Williams, Nigel Sturge ECO/212 Robert Coates February 26, 2012 Coffee Supply, Demand, and Price of Elasticity Statistics show that over half of the American population consumes coffee on a daily basis. You may drink coffee hot, cold, mixed, or even in a frappuccino. Individuals are able to make coffee at home, or buy it on the go. Coffee provides people with caffeine, which ultimately…

Words 1004 - Pages 5

The Price Elasticity Of Demand For Metlink Train Tickets

Question 1 A) POINT ONE P1=$2.26 Q1=620.82 The price elasticity of demand using the midpoint method can be calculated with the following equation: = (Q2-Q1)/ ((Q2+Q1)/2) (P2-P1)/ ((P2+P1)/2) Using the values given, the equation is as follows: = (580270-620820)/ ((580270+620820)/2) ($3.39-$2.26)/ (($3.39+$2.26)/2) = 0.06752200084923 40 This shows that the price elasticity of demand for Metlink train tickets is: = 0.16880500212308…

Words 1584 - Pages 7

Essay on Economics: Supply and Demand and Demand

Price Elasticity of Demand Report Introduction to Microeconomics/ECO102 March 25, 2013 Price Elasticity of Demand This paper will discuss about price elasticity of demand and factors that affect price elasticity of demand. Elasticity can be described as a measure of the sensitivity of demand for goods or merchandise to changes in price. Price elasticity determines how much of an impact a change in goods or services price will have on the…

Words 830 - Pages 4

Essay On Negative Income Elasticity

Demand elasticity is the responsiveness of the outside economic factors for the demand of the goods and services. Mainly there are three demand elasticities; 1) Price elasticity of demand Responsiveness of price variation a considered good or service for the variation of demand 2) Cross Price elasticity of demand Responsiveness of price variation another good or service for the variation of demand 3) Income elasticity of demand Responsiveness of Consumer’s income for the variation of demand…

Words 3407 - Pages 14