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Lecture Economics (18th edition): Chapter 6 - McConnell, Brue, Flynn's

Chapter 6 - Elasticity, consumer surplus, and producer surplus. In this chapter, students will be able to: Price elasticity of demand, the total revenue test, price elasticity of supply, cross elasticity of demand, income elasticity of demand, consumer & producer surplus, efficiency losses. | Elasticity, Consumer Surplus, and Producer Surplus Chapter 6 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Price elasticity of demand The total revenue test Price elasticity of supply Cross elasticity of demand Income elasticity of demand Consumer & producer surplus Efficiency losses 6- Price Elasticity of Demand Measuring responsiveness to price changes Elastic demand Large change in quantity purchased for given price change Inelastic demand Small change in quantity purchased for given price change 6- Price Elasticity of Demand Price-elasticity coefficient and formula Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X Ed = 6- Price Elasticity of Demand Calculate percentage change Restate formula Change in Quantity Demanded of X Original Price of X Ed = Change in Price of X Original Quantity Demanded of X ÷ 6- Price Elasticity of Demand Calculation problem Starting point matters Midpoint formula Change in Quantity Ed = Sum of Quantities/2 ÷ Change in Price Sum of Prices/2 6- Interpretations of Elasticity Elastic Demand Inelastic Demand Unit Elasticity Ed = .04 .02 = 2 Ed = .01 .02 = .5 Ed = .02 .02 = 1 6- Price Elasticity of Demand Why use percentages? Unit free measure Compare responsiveness across products Elimination of the (-) sign Extreme cases Perfectly inelastic demand Perfectly elastic demand 6- The Total Revenue Test Total Revenue = TR = PxQ Inelastic demand P and TR change in same direction Elastic demand P and TR change in opposite direction 6- $3 2 1 0 10 20 30 40 Q P Lower price and elastic demand Blue gain exceeds gold loss a b D1 The Total Revenue Test 6- $4 3 2 1 0 10 20 Q P Lower price and inelastic demand Gold loss exceeds blue gain c d D2 The Total Revenue Test 6- $3 2 1 0 10 20 30 Q P Lower price and unit-elastic demand Blue gain equals yellow loss e f D3 The Total Revenue Test 6- ] ] ] ] ] ] ] . | Elasticity, Consumer Surplus, and Producer Surplus Chapter 6 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Price elasticity of demand The total revenue test Price elasticity of supply Cross elasticity of demand Income elasticity of demand Consumer & producer surplus Efficiency losses 6- Price Elasticity of Demand Measuring responsiveness to price changes Elastic demand Large change in quantity purchased for given price change Inelastic demand Small change in quantity purchased for given price change 6- Price Elasticity of Demand Price-elasticity coefficient and formula Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X Ed = 6- Price Elasticity of Demand Calculate percentage change Restate formula Change in Quantity Demanded of X Original Price of X Ed = Change in Price of X Original Quantity Demanded of X ÷ 6- Price Elasticity of Demand Calculation problem Starting