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Lecture Issues in economics today - Chapter 3: The concept of elasticity and consumer and producer surplus

Chapter 3 - The concept of elasticity and consumer and producer surplus. The following will be discussed in this chapter: Elasticity of demand, alternative ways of understanding elasticity, more on elasticity, consumer and producer surplus. | Chapter 3 The Concept of Elasticity and Consumer and Producer Surplus Chapter Outline ELASTICITY OF DEMAND ALTERNATIVE WAYS OF UNDERSTANDING ELASTICITY MORE ON ELASTICITY CONSUMER AND PRODUCER SURPLUS Elasticity Elasticity: the responsiveness of quantity to a change in another variable Price Elasticity of Demand: the responsiveness of quantity demanded to a change in price Price Elasticity of Supply: the responsiveness of quantity supplied to a change in price Income Elasticity of Demand: the responsiveness of quantity demanded to a change in income Cross Price Elasticity of Demand: the responsiveness of quantity demanded of one good to a change in the price of another good The Mathematical Representation of Elasticity Elasticity = %ΔQ %ΔP = ΔQ ΔP Q P Because the demand curve is downward sloping and the supply curve is upward sloping the elasticity of demand is negative and the elasticity of supply is positive. Often these signs are implicit and ignored. Elasticity Labels Elastic : . | Chapter 3 The Concept of Elasticity and Consumer and Producer Surplus Chapter Outline ELASTICITY OF DEMAND ALTERNATIVE WAYS OF UNDERSTANDING ELASTICITY MORE ON ELASTICITY CONSUMER AND PRODUCER SURPLUS Elasticity Elasticity: the responsiveness of quantity to a change in another variable Price Elasticity of Demand: the responsiveness of quantity demanded to a change in price Price Elasticity of Supply: the responsiveness of quantity supplied to a change in price Income Elasticity of Demand: the responsiveness of quantity demanded to a change in income Cross Price Elasticity of Demand: the responsiveness of quantity demanded of one good to a change in the price of another good The Mathematical Representation of Elasticity Elasticity = %ΔQ %ΔP = ΔQ ΔP Q P Because the demand curve is downward sloping and the supply curve is upward sloping the elasticity of demand is negative and the elasticity of supply is positive. Often these signs are implicit and ignored. Elasticity Labels Elastic : the condition of demand when the percentage change in quantity is larger than the percentage change in price Inelastic: the condition of demand when the percentage change in quantity is smaller than the percentage change in price Unitary Elastic: the condition of demand when the percentage change in quantity is equal to the percentage change in price Alternative Ways to Understand Elasticity The Graphical Explanation The Relationship Between Slope and Elasticity Elasticity and the slope of the demand curve are not the same but they are related. At a given price level, elasticity is greater with a flatter demand curve. With a linear demand curve (meaning a demand curve that has a single value for the slope) elasticity is greater at higher prices Figure 1 Flatter Demand Means Greater Elasticity D1 D2 Q/t P Q* P* P1 P2 Q1=Q2 Figure 2 Higher Prices Means Greater Elasticity Q/t P D P1 1 Q1 4 P4 Q4 3 P3 Q3 2 P2 Q2 Alternative Ways to Understand Elasticity A good for which there are no good .