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Chapter 4
Elasticity . . .
allows us to analyze supply and
to small changes in X.
X
= Y/Y X/X.
big changes in X.
EX = (Y2Y1)/(Y2+Y1) (X2-X1)/(X2+X1).
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P ric e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e in p ric e
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P ric e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e in p ric e
(1 0 8 )
100
20%
10
2
( 2 .2 0 2 .0 0 )
100 10%
2 .0 0
(Q2 Q1 ) /[(Q2 Q1 ) / 2]
Price elasticity of demand =
( P2 P1 ) /[( P2 P1 ) / 2]
(10 8)
22%
(10 8) / 2
2.32
(2.20 2.00)
9.5%
(2.00 2.20) / 2
Elastic Demand
Perfectly Elastic
Unit Elastic
Price
(4.00 5.00)
(100 50)/2
(4.00 5.00)/2
$5
4
Demand
67 percent
3
22 percent
50
100
Quantity
100
Quantity
$5
4
1. A 22%
increase
in price . . .
Demand
90
100
Quantity
$5
4
Demand
1. A 22%
increase
in price . . .
80
100
Quantity
$5
4
Demand
1. A 22%
increase
in price . . .
50
100
Quantity
Demand
2. At exactly $4,
consumers will
buy any quantity.
0
3. At a price below $4,
quantity demanded is infinite.
Quantity
TR=PQ
Price Elasticity of
Demand
In all cases, P < 0 .
Price Elasticity and Total Revenue
Revenue constant if P= 1.
Price
$4
P Q = $400
(revenue)
Demand
100
Q
Quantity
Price
An Increase in price from $1
to $3
leads to an Increase in
total revenue from $100 to
$240
$3
Revenue = $240
$1
Demand
Revenue = $100
0
100
Quantity
Demand
0
80
Quantity
Price
An Increase in price from $4
to $5
leads to an decrease in
total revenue from $200 to
$100
$5
$4
Demand
Demand
Revenue = $200
Revenue = $100
50
Quantity
20
Quantity
MR = P/[1+(1/ P)].
Types of Goods
Normal
Goods
Inferior Goods
Cross-price Elasticity of
Demand
Cross-price elasticity shows demand
PX = QY/QY PX/PX.