Tuff Enuff.The Fabulous Thunderbirds

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Tuff Enuff.The Fabulous Thunderbirds
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ELASTICITIES

• Are your friends
• Are not that hard to compute
• Are useful
• All of the above

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Why elasticities? Slopes are unit sensitive
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Own Price elasticity of demand percent change in
quantity demanded given a 1 percent change in the
price
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Figure 7 Extreme Cases of Demand
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Figure 7 Extreme Cases of Demand
NELASTIC
ELASTIC
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Relationship between demand slope and elasticity
Elasticity (1/slope)(P/Q)
Perfectly inelastic
PRICE
Perfectly elastic
Relatively Elastic Demand
Relatively Inelastic Demand
Quantity
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When does it pay to raise the price?
PRICE
P1
P0
Demand
Quantity
Q1
Q0
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When does it pay to raise the price?If you can
produce less and raise more revenue, profit has
to rise
Change in total revenue P1Q1-P0Q0
PRICE
P1
P0
Demand
Quantity
Q1
Q0
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When does it pay to raise the price?If you can
produce less and raise more revenue, profit has
to rise
Change in total revenue P1Q1-P0Q0
PRICE
Gain Q1(P1 P0) Q1?P
P1
Loss P0(Q0 - Q1) P0 ?Q
P0
Demand
Quantity
Q1
Q0
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When does it pay to raise the price?
SUPPOSE DEMAND IS ELASTIC SO THAT THE CHANGE IN
QUANTITY IS BIGGER THAN THE CHANGE IN PRICE
LOSS
GAIN
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When does it pay to raise the price?
SUPPOSE DEMAND IS INELASTIC SO THAT THE CHANGE
IN QUANTITY IS SMALLER THAN THE CHANGE IN PRICE
LOSS
GAIN
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ED gt 1 elastic
PRICE
As P increases, Q falls, elasticity gets bigger
ED 1 Unit elastic
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ED lt 1 inelastic
QUANTITY
25
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Table 1 Effects of Price Changes on Expenditure
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APPLICATION ISU NONRESIDENT TUITION POLICY
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http//www.bls.gov/opub/ted/2005/mar/wk4/art02.htm

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Largest percentage of out-of-state first-year
students, 2006-07 Vermont, Burlington
72.7 Delaware, Newark 66.2 North Dakota, Grand
Forks 54.2 New Hampshire, Durham 50.5 West
Virginia, Morgantown 50.0 Rhode Island,
Kingston 49.9 Mississippi, Oxford 47.4 Iowa,
Iowa City 42.3 Colorado, Boulder 41.4 Auburn
(Ala.) 39.5
Source USA TODAY
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ISU Nonresident Enrollment and Nonresident
Tuition and Fees, 2002-2005
Source ISU FACTBOOK
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ISU Nonresident Enrollment and Nonresident
Tuition and Fees, 2002-2005
Source ISU FACTBOOK
Freshmen (-21)/(30) 0.7 All Nonresident
(-2)/(30) 0.067
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ISU Nonresident Enrollment and Nonresident
Tuition and Fees, 2002-2005
Source ISU FACTBOOK
Freshmen (-21)/(30) 0.7 All Nonresident
(-2)/(30) 0.067
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Some Short-Run Price Elasticities of Demand
elastic
ABILITY TO SUBSTITUTE Presence of and access to
substitutes Narrow vs broad items Short vs Long
Run
inelastic
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Table 5 Some Income Elasticities
Luxury (gt1), Necessity (0ltEY lt1), Normal (gt0) and
Inferior (lt0) Goods defined by Income elasticties
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Table 7 Some Cross-Price Elasticities
Complements (lt0) vs Substitutes (gt0) defined by
sign of cross price elasticity
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Demand for Iowa State University 1969-2001
Resident Students (unit of observation
county) Enrollment a bISU Tuition cIncome
dCom. College Tuition Nonresident Students
(unit of observation state) Enrollment a
bISU Tuition cIncome dHome State Tuition
Computed Arc Elasticities Resident Students ISU
Tuition (ED) 0.25 Income (EY )
0.49 Community College Tuition (EX,Z )
0.29 Nonresident Students ISU Tuition (ED )
0.36 Income (EY ) 0.00 Home State
Tuition (EX,Z ) 0.41
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The War on Drugs Which is more
effective Restricting supply or restricting
demand?
(a)
(b)
(c)
Price
Price
Price
per
per
per
Unit
Unit
Unit
S
S
S
1
1
1
A
A
A
P
P
P
1
1
1
D
D
D
1
1
1
Q
Q
Q
1
1
1
Quantity
Quantity
Quantity
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Company out of class challenge Which Markets
should Southwest Airlines Enter?A) High
elasticity of demand for airline travelB) Low
elasticity of demand for airline travelExplain
your answerTurn in at start of period next time

• Note that Southwest is a low cost carrier
• It needs full planes and high volume to make
  profits