Lecture 7 Elasticity: sensitivity to a price change

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Lecture 7Elasticity sensitivity to a price
change

• How would you respond to a

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Price Elasticity of Demand (Ed) The degree to
which consumer respond to a price change.
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elastic demand
inelastic demand
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Determinants of elasticity of demand

• availability of substitutes
• The more good close substitutes the more
• necessity
• The more necessary the good the more
• portion of total budget
• The smaller the share of the total budget the
  more
• definition of the good
• The more narrowly the good is defined the more
• length of time period
• The longer the time period the more

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Extreme Elasticities
Case 1 What if consumers didnt respond at all
to a price change? Ed - ?Qd / ?P
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Extreme Elasticities
Case 2 What if consumers response precisely
matched the price change?
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Extreme Elasticities
Case 3 What if consumers will pay only one
price? Ed - ?Qd / ?P
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Elasticity, Revenues Expenditures

• total revenue (TR) receipts from the sale of a
  good
• total expenditure (TE) payment spent on
  purchasing a good
• if there are no taxes or subsidies

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Elasticity, Revenues Expenditures

• What happens to TR (and TE) when price increases?

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Elasticity, Revenues Expenditures

• if Ed gt 1? ?Qd gt ?P

if Ed gt 1
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Elasticity, Revenues Expenditures

• if Ed 1? ?Qd ?P

if Ed 1
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Elasticity, Revenues Expenditures

• if Ed lt 1? ?Qd lt ?P

if Ed lt 1
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Price Elasticity of Supply (Es) The degree to
which producers respond to a price change.
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elastic supply
inelastic supply
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perfectly elastic supply
perfectly inelastic supply