Chapter 4 - Elasticity of demand and supply. Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in the chapter. The text attempts to sharpen students’ ability to estimate price elasticity by discussing its major determinants. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross- and income elasticities of demand and price elasticity of supply are also addressed. | Chapter 4 Elasticity of Demand and Supply McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in the chapter. The text attempts to sharpen students’ ability to estimate price elasticity by discussing its major determinants. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross- and income elasticities of demand and price elasticity of supply are also addressed. Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity 4- Law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more. The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand. If demand is elastic, there is a large change in quantity demanded even when price changes by a small amount. When demand is inelastic, there is a very small change in quantity demanded even when there is a large change in price. Price-Elasticity Coefficient Formula Formula for price elasticity of demand Percentage change in quantity demanded of product X Percentage change in price of product X Ed = 4- Quantitative measure of elasticity Ed = percentage change in quantity/percentage change in price. Price-Elasticity Coefficient Formula Use the midpoint formula Ensures consistent results Ed = ÷ Change in quantity Change in price Sum of quantities / 2 Sum of prices / 2 4- Using traditional calculations, the measured elasticity over a given range of prices is sensitive to whether one starts at the higher price and goes down, or the lower price and goes up. The . | Chapter 4 Elasticity of Demand and Supply McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in the chapter. The text attempts to sharpen students’ ability to estimate price elasticity by discussing its major determinants. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross- and income elasticities of demand and price elasticity of supply are also addressed. Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity 4- Law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more. The degree of .
