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1、0ElasticityLearning ObjectiveElasticities of Supply and DemandShort-Run versus Long-Run Elasticities12ElasticityBasic idea:Elasticity measures how much one variable responds to changes in another variable.Definition:Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its de

2、terminants.3Price Elasticity of DemandPrice elasticity of demand measures how much Qd responds to a change in P.Price elasticity of demand=Percentage change in QdPercentage change in PLoosely speaking,it measures the price-sensitivity of buyers demand.4Price Elasticity of DemandPrice elasticity of d

3、emand equals PQDQ2P2P1Q1P rises by 10%Q falls by 15%15%10%=1.5Price elasticity of demand=Percentage change in QdPercentage change in PExample:5Price Elasticity of DemandAlong a D curve,P and Q move in opposite directions,which would make price elasticity negative.We will drop the minus sign and repo

4、rt all price elasticities as positive numbers.PQDQ2P2P1Q1Price elasticity of demand=Percentage change in QdPercentage change in P6Calculating Percentage ChangesPQD$2508B$20012AStandard method of computing the percentage(%)change:end value start valuestart valuex 100%Going from A to B,the%change in P

5、 equals($250$200)/$200=25%7Calculating Percentage ChangesPQD$2508B$20012AProblem:The standard method gives different answers depending on where you start.From A to B,P rises 25%,Q falls 33%,elasticity=33/25=1.33From B to A,P falls 20%,Q rises 50%,elasticity=50/20=2.50 8Calculating Percentage Changes

6、So,we instead use the midpoint method:end value start valuemidpointx 100%The midpoint is the number halfway between the start&end values,the average of those values.It doesnt matter which value you use as the“start”and which as the“end”you get the same answer either way!9Calculating Percentage Chang

7、esUsing the midpoint method,the%change in P equals$250$200$225x 100%=22.2%The%change in Q equals12 810 x 100%=40.0%The price elasticity of demand equals40/22.2 =1.8 Point Elasticity of Demand Price elasticity at a particular point on the demand curve.Point versus Arc Elasticities Arc Elasticity of D

8、emand Price elasticity calculated over a range of prices.11Elasticity of a Linear Demand CurveThe slope of a linear demand curve is constant,but its elasticity is not.PQ$302010$00204060200%40%=5.0E =67%67%=1.0E =40%200%=0.2E =12The Variety of Demand CurvesThe price elasticity of demand is closely re

9、lated 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.Five different classifications of D curves.13Q1P1D“Perfectly inelastic demand”(one extreme case)PQP2P falls by 10%Q changes by 0%0%10%=0Price elastici

10、ty of demand=%change in Q%change in P=Consumers price sensitivity:D curve:Elasticity:verticalnone014D“Inelastic demand”PQQ1P1Q2P2Q rises less than 10%10%10%1Price elasticity of demand=%change in Q%change in P=P falls by 10%Consumers price sensitivity:D curve:Elasticity:relatively steeprelatively low

11、 10%10%1Price elasticity of demand=%change in Q%change in P=P falls by 10%Consumers price sensitivity:D curve:Elasticity:relatively flatrelatively high 117D“Perfectly elastic demand”(the other extreme)PQP1Q1P changes by 0%Q changes by any%any%0%=infinityQ2P2=Consumers price sensitivity:D curve:Elast

12、icity:infinityhorizontalextremePrice elasticity of demand=%change in Q%change in P=18Price Elasticity of SupplyPrice elasticity of supply measures how much Qs responds to a change in P.Price elasticity of supply=Percentage change in QsPercentage change in PLoosely speaking,it measures sellers price-

13、sensitivity.19Q2Price Elasticity of SupplyPrice elasticity of supply equals PQSP2Q1P1P rises by 8%Q rises by 16%16%8%=2.0Price elasticity of supply=Percentage change in QsPercentage change in PExample:20The Variety of Supply CurvesThe slope of the supply curve is closely related to price elasticity

14、of supply.Rule of thumb:The flatter the curve,the bigger the elasticity.The steeper the curve,the smaller the elasticity.Five different classifications.21S“Perfectly inelastic”(one extreme)PQQ1P1P2Q changes by 0%0%10%=0Price elasticity of supply=%change in Q%change in P=P rises by 10%Sellers price s

15、ensitivity:S curve:Elasticity:verticalnone022S“Inelastic”PQQ1P1Q2P2Q rises less than 10%10%10%1Price elasticity of supply=%change in Q%change in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:relatively steeprelatively low 10%10%1Price elasticity of supply=%change in Q%change in P=P ri

16、ses by 10%Sellers price sensitivity:S curve:Elasticity:relatively flatrelatively high 125S“Perfectly elastic”(the other extreme)PQP1Q1P changes by 0%Q changes by any%any%0%=infinityPrice elasticity of supply=%change in Q%change in P=Q2P2=Sellers price sensitivity:S curve:Elasticity:horizontalextreme

17、infinity26Other ElasticitiesIncome elasticity of demand:measures the response of Qd to a change in consumer incomeIncome elasticity of demand=Percent change in QdPercent change in incomeRecall from Chapter 4:An increase in income causes an increase in demand for a normal good.Hence,for normal goods,

18、income elasticity 0.For inferior goods,income elasticity 0(e.g.,an increase in price of beef causes an increase in demand for chicken)For complements,cross-price elasticity 0(e.g.,an increase in price of computers causes decrease in demand for software)28Short-run Vs.Long-run Elasticities of DemandT

19、he price of gasoline rises 20%.Does Qd drop more in the short run or the long run?Why?Theres not much people can do in the short run,other than ride the bus or carpool.In the long run,people can buy smaller cars or live closer to where they work.Lesson:Price elasticity is higher in the long run than

20、 the short run for many goodsGasoline29The price of automobile rises 20%.Does Qd drop more in the short run or the long run?Why?In the short run,consumers initially defer buying new cars;thus annual quantity demanded falls sharply.In the longer run,old cars wear out and must be replaced;thus annual

21、quantity demanded picks up.Lesson:Price elasticity is higher in the short run than the long run for durability.AutomobileShort-run Vs.Long-run Elasticities of Demand30Short-run Vs.Long-run Elasticities of Supplyn For most products,long-run is much more price elastic than short-run supply Firms face capacity constraints in the short run.Example:Rental housing For durability,supply is more elastic in the short run than in the long run.Example:secondary supply of metals