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Lecture Principles of microeconomics - Chapter 5: Elasticity and its application

In this chapter you will learn the meaning of the elasticity of demand, examine what determines the elasticity of demand, learn the meaning of the elasticity of supply, examine what determines the elasticity of supply, apply the concept of elasticity in three very different markets. | Elasticity and Its Application Chapter 5 1 1 Elasticity . . . is a measure of how much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater precision. Journal Question-Name 3 necessities and 3 luxuries that you would buy. 2 2 Price Elasticity of Demand Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that good. 4 5 Computing the Price Elasticity of Demand The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price Elasticity = Percentage Change in Qd Of Demand Percentage Change in Price 16 10 Elasticity, Percentage Change and Slope Because the price elasticity of demand measures how much quantity demanded responds to the price, it is closely related to the slope of the demand curve. But | Elasticity and Its Application Chapter 5 1 1 Elasticity . . . is a measure of how much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater precision. Journal Question-Name 3 necessities and 3 luxuries that you would buy. 2 2 Price Elasticity of Demand Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that good. 4 5 Computing the Price Elasticity of Demand The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price Elasticity = Percentage Change in Qd Of Demand Percentage Change in Price 16 10 Elasticity, Percentage Change and Slope Because the price elasticity of demand measures how much quantity demanded responds to the price, it is closely related to the slope of the demand curve. But instead of looking at unit change, elasticity looks at percentage change. What do we mean by percentage change? 7 7 Brief Assessment on Percentages If there are 50 tomatoes in a store and you picked 16 of them, what percentage of the total did you pick? Paul used to weigh 200 lbs last year, but now he only weighs 175 lbs. How many lbs did he lose? What is the percent change of the loss? What is the average of 300 and 330? What is the midpoint? Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as: Computing the Price Elasticity of Demand Using the Midpoint Formula The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change. 16 10 Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases from .