经济学EconomicsforToday3E5.ppt
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1、,Chapter 5,Elasticity of demand and supply,3,Key concepts,Defining elasticity Explaining: price elasticity of demand income elasticity of demand cross elasticity of demand price elasticity of supply Understanding how a tax burden and elasticity are related,4,The concept of elasticity,Elasticity is t
2、he term used in economics to explain the sensitivity of one variable to changes in another variable. Elasticity is useful for business decision-making (e.g. pricing, marketing) and policy-making.,5,Price elasticity of demand,Price elasticity of demand measures the sensitivity of quantity demanded by
3、 consumers to changes in price. The formula for price elasticity of demand is: Ed =,percentage change in quantity demanded percentage change in price,6,Price elasticity of demand (cont.),Example: A concert raises ticket prices from $25 to $30, and the number of seats sold falls from 20 000 to 10 000
4、.,Price elasticity of demand (cont.),When we move along a demand curve between two points, we get different answers to elasticity depending on whether we are moving up or down the demand curve. When the price is lowered rather than raised:,7,8,The midpoint formula,We can overcome this disparity usin
5、g the midpoint formula: Recalculating our previous example yields Ed = 3.7,9,Elasticity coefficients,At introductory levels, it is conventional to ignore the minus sign that should result from calculations. The elasticity coefficient could be: elastic (Ed 1) inelastic (Ed 1) unitary elastic (Ed = 1)
6、,10,Elastic demand (Ed 1),Elastic demand indicates that the percentage change in quantity demanded is greater than the percentage change in price. This means consumers are sensitive to the price change.,11,Example of elastic demand,A rock group decreases its prices from $30 to $20, and quantity dema
7、nded rises from 10 000 to 30 000 tickets. Using the percentage change method:,12,Example calculations,Using the midpoint formula:,Ed = 2.5 demand is price elastic.,Elastic demand coefficients,14,Other coefficients,Inelastic: When the percentage change in the quantity demanded is smaller than the per
8、centage change in the price. Consumers are not sensitive to the price change. Unitary elastic: When the percentage change in the quantity demanded is equal to the percentage change in price.,Other coefficients (cont.),15,16,The total revenue test,Total revenue is the revenue a firm earns from sales
9、it is equal to price multiplied by quantity demanded. Depending on the elasticity coefficient, a decrease in price may lead to: increase in total revenue (elastic) decrease in total revenue (inelastic) no change in total revenue (unitary).,17,Perfectly elastic demand & perfectly inelastic demand,Per
10、fectly elastic demand: a small percentage change in price brings about an infinite percentage change in the quantity demanded. Perfectly inelastic demand: the quantity demanded does not change as the price rises.,Perfectly elastic demand & perfectly inelastic demand,18,19,Variations along a straight
11、-line demand curve,The price elasticity of demand varies as we move along the demand curve. Any straight line demand curve has three ranges: a price elastic range (at high prices) a unitary elastic point a price inelastic range (at low prices).,Variations along a straight-line demand curve (cont.),2
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