With yesterday's cvs, this file fauses lyx2lyx to roll over and die.
--
Richard E. Hawkins, Asst. Prof. of Economics /"\ ASCII ribbon campaign
[EMAIL PROTECTED] Smeal 178 (814) 375-4700 \ / against HTML mail
These opinions will not be those of X and postings.
Penn State until it pays my retainer. / \
#This file was created by <hawk> Tue Oct 17 09:42:43 2000
#LyX 1.0 (C) 1995-1999 Matthias Ettrich and the LyX Team
\lyxformat 2.15
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\options dvips
\layout Slide
\layout Standard
Chapter 5: Elasticity
\layout Standard
\protected_separator
\layout Standard
How much does demand bend when price changes?
\layout Itemize
\begin_inset Quotes eld
\end_inset
responsiveness
\begin_inset Quotes erd
\end_inset
\layout Itemize
recall the Law of Demand
\begin_deeper
\layout Itemize
\begin_inset Formula \( P\uparrow \Longrightarrow Q\downarrow \)
\end_inset
\layout Itemize
but maybe the seller is better off with lower quantity and higher price
\end_deeper
\layout Itemize
elasticity affects Total Revenue
\layout Slide
\layout Standard
Example 1
\layout Itemize
At a price of 100, I sell 50, for revenue of 5,000
\layout Itemize
At a price of 200, I sell 40, for revenue of 8,000
\layout Itemize
Seller receives more revenue at the higher price
\layout Slide
\layout Standard
Proportional Change
\layout Itemize
Elasticity measures
\emph on
proportional
\emph default
changes.
It is the ratio of two changes, expressed as percentages
\layout Itemize
The elasticity of Y with respect to X is the percentage change in Y divided
by the percentage change in X
\layout Itemize
\begin_inset Formula \( E_{y,x}=\frac{\%\textrm{ change in Y}}{\%\textrm{ change in
X}}=\frac{\textrm{ }\frac{\Delta Y}{Y}\textrm{ }}{\frac{\Delta X}{X}} \)
\end_inset
\layout Itemize
elasticity does
\emph on
not
\emph default
depend on units used to measure
\layout Note
\layout Standard
Go quickly on next four; they're quite similar
\layout Slide
\layout Standard
Price Elasticity of Demand
\layout Itemize
\begin_inset Formula \( E_{d}=\frac{\textrm{ }\frac{\Delta Q_{d}}{Q_{d}}\textrm{
}}{\frac{\Delta P}{P}}=\frac{\Delta Q_{d}}{\Delta P}\frac{P}{Q_{d}} \)
\end_inset
\layout Itemize
it is
\emph on
always
\emph default
negative
\begin_deeper
\layout Itemize
that is, demand always goes down when the price increases
\end_deeper
\layout Slide
\layout Standard
The Base point for calculation
\layout Itemize
We get different answers depending upon where we measure from
\layout Itemize
Change from price of $100 to $200 with decrease in quantity demanded from 75 to 25
\layout Slide
\layout Standard
Measure starting from (100,75),
\layout Itemize
price is
\begin_inset Formula \( 100 \)
\end_inset
\begin_deeper
\layout Itemize
quantity is
\begin_inset Formula \( 75 \)
\end_inset
\layout Itemize
change in price is
\begin_inset Formula \( 100 \)
\end_inset
\layout Itemize
change in quantity is
\begin_inset Formula \( -50 \)
\end_inset
\layout Itemize
\begin_inset Formula \( E_{d}=\frac{\Delta Q_{d}}{\Delta
P}\frac{P}{Q_{d}}=\frac{-50}{100}\frac{100}{75}=-\frac{2}{3} \)
\end_inset
\end_deeper
\layout Slide
\layout Standard
Measure starting from (200,25)
\layout Itemize
price is
\begin_inset Formula \( 200 \)
\end_inset
\layout Itemize
quantity is
\begin_inset Formula \( 25 \)
\end_inset
\layout Itemize
change in price is
\begin_inset Formula \( -100 \)
\end_inset
\layout Itemize
change in quantity is
\begin_inset Formula \( 50 \)
\end_inset
\layout Itemize
and get
\begin_inset Formula \( e_{d}=\frac{\Delta Q_{d}}{\Delta
P}\frac{P}{Q_{d}}=\frac{50}{-100}\frac{200}{25}=-4 \)
\end_inset
\layout Slide
\layout Standard
Measure from the middle--price increase
\layout Itemize
price is
\begin_inset Formula \( \frac{100+200}{2}=150 \)
\end_inset
\layout Itemize
quantity is
\begin_inset Formula \( \frac{25+75}{2}=50 \)
\end_inset
\layout Itemize
for price increase
\layout Itemize
\begin_inset Formula \( \Delta P=100 \)
\end_inset
\layout Itemize
\begin_inset Formula \( \Delta Q=-50 \)
\end_inset
\layout Itemize
\begin_inset Formula \( E_{d}=\frac{-50}{100}\times \frac{150}{50}=-\frac{3}{2} \)
\end_inset
\layout Slide
\layout Standard
Measure from the middle--price decrease
\layout Itemize
price is
\begin_inset Formula \( \frac{100+200}{2}=150 \)
\end_inset
\layout Itemize
quantity is
\begin_inset Formula \( \frac{25+75}{2}=50 \)
\end_inset
\layout Itemize
\begin_inset Formula \( \Delta P=-100 \)
\end_inset
\layout Itemize
\begin_inset Formula \( \Delta Q=50 \)
\end_inset
\layout Itemize
\begin_inset Formula \( E_{d}=\frac{50}{-100}\times \frac{150}{50}=-\frac{3}{2} \)
\end_inset
\layout Slide
\layout Standard
Benefits of measuring from the middle
\layout Itemize
Measuring from the middle may reduce error
\layout Itemize
it also gives us the same elasticity for an increase and for a decrease
\layout Itemize
considering small changes in price and quantity will reduce error
\layout Slide
\layout Standard
Ranges of Elasticity
\layout Itemize
\begin_inset Quotes eld
\end_inset
price inelastic
\begin_inset Quotes erd
\end_inset
\begin_deeper
\layout Itemize
The magnitude of the elasticity coefficient is less than 1
\begin_deeper
\layout Itemize
\begin_inset Formula \( -1<E_{d}<0 \)
\end_inset
\end_deeper
\layout Itemize
Demand doesn't change much with price
\end_deeper
\layout Itemize
\begin_inset Quotes eld
\end_inset
price elastic
\begin_inset Quotes erd
\end_inset
\begin_deeper
\layout Itemize
magnitude of the coefficient exceeds 0
\begin_deeper
\layout Itemize
\begin_inset Formula \( E_{d}<-1 \)
\end_inset
\end_deeper
\layout Itemize
very sensitive to price
\end_deeper
\layout Itemize
Slope depends upon the
\emph on
units
\emph default
in which price and quantity are expressed, while elasticity does not
\layout Note
m
\layout Standard
Warn about HS teachers and dropping the negative sign
\layout Slide
\layout Standard
Elasticity and Total Revenue
\layout Itemize
TR = P*Q
\layout Itemize
Categories of demand elasticity
\layout Standard
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2 0 1 "" ""
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0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
Perfectly
\newline
no ability to
\newline
\begin_inset Formula \( E_{d}=-\infty \)
\end_inset
\newline
Elastic
\newline
raise price
\newline
\newline
Elastic
\newline
can raise price,
\newline
\begin_inset Formula \( -\infty <E_{d}<-1 \)
\end_inset
\newline
\newline
but lose revenue
\newline
\newline
Unit Elastic
\newline
raising price doesn't
\newline
\begin_inset Formula \( E_{d}=-1 \)
\end_inset
\newline
\newline
change revenue
\newline
\newline
Inelastic
\newline
raising price
\newline
\begin_inset Formula \( -1<E_{d}<-0 \)
\end_inset
\newline
\newline
increases revenue
\newline
\newline
Perfectly
\newline
raising price doesn't
\newline
\begin_inset Formula \( E_{d}=0 \)
\end_inset
\newline
Inelastic
\newline
affect quantity
\newline
\newline
\newline
demanded
\newline
\layout Standard
\latex latex
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\latex default
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\latex default
\layout Itemize
Revenue
\emph on
increases
\emph default
with a price increase for inelastic goods, and
\emph on
decreases
\emph default
for elastic
\layout Itemize
[slide 05-04]
\layout Slide
\layout Standard
Elasticity along the Demand Curve
\layout Itemize
Elasticity is
\emph on
not
\emph default
constant along the curve
\begin_deeper
\layout Itemize
[Slide 05-02]
\end_deeper
\layout Itemize
Will generally be inelastic at
\begin_inset Quotes eld
\end_inset
low
\begin_inset Quotes erd
\end_inset
prices, unit-elastic at some price, and increasingly elastic at higher
prices
\layout Itemize
TR is highest at unit elasticity
\layout Slide
\layout Standard
Constant Elasticity Demand Curves
\layout Itemize
we
\emph on
can
\emph default
have demand curves with constant elasticity
\layout Itemize
[slide 05-03]
\layout Slide
\layout Standard
Determinants of Price Elasticity of Demand
\layout Itemize
The available substitutes
\begin_deeper
\layout Itemize
Demand becomes more elastic when close substitutes are available
\layout Itemize
broader definitions of goods lead to less substitutes & less elasticity
\begin_deeper
\layout Itemize
but would mean changing price for the entire category
\end_deeper
\end_deeper
\layout Itemize
Proportion of budget spent on item
\begin_deeper
\layout Itemize
tends to be inelastic for smaller shares
\end_deeper
\layout Itemize
Time and Elasticity
\begin_deeper
\layout Itemize
Given more time, people can modify habits
\layout Itemize
[slide 05-05 and 05-06]
\end_deeper
\layout Note
\layout Itemize
ex: sudden increase in gas prices.
Cindy Commuter can't suddenly drive less Tuesday morning.
But by next Monday, she can arrange a car-pool, and by next year, she can
buy a more fuel efficient car.
Meanwhile, Sam Sunday-Driver might initially take shorter drives, but eventuall
y
resign himself to the higher price.
\layout Slide
\layout Standard
Income Elasticity of Demand
\layout Itemize
note: the book does supply first
\layout Itemize
Measures proportional changes in demand from proportional changes in income
\layout Itemize
\begin_inset Formula \( E_{y}=\frac{\%\Delta Q}{\%\Delta Y}=\frac{\Delta Q}{\Delta
Y}\frac{Y}{Q} \)
\end_inset
\layout Standard
\latex latex
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\layout Standard
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multicol5
3 3 0 0 0 0 0 0
1 2 0 0
0 1 0 0
0 1 0 0
8 1 1 "" ""
8 0 1 "" ""
8 0 1 "" ""
0 8 1 2 0 0 0 "" ""
0 8 1 2 0 0 0 "" ""
0 8 1 2 0 0 0 "" ""
0 8 0 1 0 0 0 "" ""
0 8 0 1 0 0 0 "" ""
0 8 0 1 0 0 0 "" ""
0 8 0 1 0 0 0 "" ""
0 8 0 1 0 0 0 "" ""
0 8 0 1 0 0 0 "" ""
Type
\newline
sign
\newline
change in
\begin_inset Formula \( Q_{d} \)
\end_inset
\newline
normal
\newline
+
\newline
\begin_inset Formula \( \uparrow \)
\end_inset
\newline
inferior
\newline
-
\newline
\begin_inset Formula \( \downarrow \)
\end_inset
\layout Standard
\latex latex
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\latex default
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\latex default
\layout Slide
\layout Standard
Cross-Price Elasticity
\layout Itemize
the proportional changes when the price of
\emph on
another
\emph default
good is changed
\layout Itemize
\begin_inset Formula \( E_{xz}=\frac{\%\Delta Q_{x}}{\%\Delta P_{z}} \)
\end_inset
\layout Standard
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\latex default
\layout Standard
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multicol5
3 3 0 0 0 0 0 0
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0 1 0 0
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0 8 0 1 0 0 0 "" ""
0 8 0 1 0 0 0 "" ""
Type
\newline
sign
\newline
change in
\begin_inset Formula \( Q_{d} \)
\end_inset
\newline
substitute
\newline
+
\newline
\begin_inset Formula \( \uparrow \)
\end_inset
\newline
complement
\newline
-
\newline
\begin_inset Formula \( \downarrow \)
\end_inset
\layout Standard
\latex latex
\backslash par{}
\latex default
\latex latex
\backslash vspace{0.3cm}
\latex default
\layout Itemize
Substitute goods: positive cross-elasticity
\begin_deeper
\layout Itemize
As the price of the other good increases, people buy more of this good (substitu
ting
it for the other)
\end_deeper
\layout Itemize
Complementary goods: negative cross-elasticity.
\begin_deeper
\layout Itemize
As the price of the other good rises, people buy less of this good (less
ice cream when cones go up in price
\end_deeper
\layout Slide
\layout Standard
Price Elasticity of Supply (1 of 2)
\layout Itemize
responsiveness of quantity
\emph on
supplied
\emph default
to changes in price
\begin_deeper
\layout Itemize
\begin_inset Formula \( E_{s}=\frac{\%\Delta Q^{s}}{\%\Delta P} \)
\end_inset
\layout Itemize
always positive
\end_deeper
\layout Itemize
[slide 05-07]
\layout Slide
\layout Standard
Categories of supply elasticity
\layout Standard
\latex latex
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\latex default
\latex latex
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\latex default
\layout Standard
\LyXTable
multicol5
14 3 0 0 0 0 0 0
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0 0 0 0
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0 0 0 0
0 1 0 0
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0 0 0 0
0 1 0 0
0 0 0 0
0 0 0 0
0 1 0 0
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2 0 1 "" ""
2 0 1 "" ""
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0 2 0 0 0 0 0 "" ""
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0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 0 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
0 2 0 1 0 0 0 "" ""
Perfectly
\newline
any quantity will
\newline
\begin_inset Formula \( E_{s}=\infty \)
\end_inset
\newline
Elastic
\newline
be supplied at
\newline
\newline
\newline
the market price
\newline
\newline
Relatively
\newline
\begin_inset Formula \( Q^{s} \)
\end_inset
increases
\newline
\begin_inset Formula \( 1<E_{s}<\infty \)
\end_inset
\newline
Elastic
\newline
by proportionally
\newline
\newline
\newline
more than
\begin_inset Formula \( P \)
\end_inset
\newline
\newline
Unit
\newline
\begin_inset Formula \( Q^{s} \)
\end_inset
increases
\newline
\begin_inset Formula \( E_{s}=1 \)
\end_inset
\newline
Elastic
\newline
proportionally to
\begin_inset Formula \( P \)
\end_inset
\newline
\newline
Relatively
\newline
\begin_inset Formula \( Q^{s} \)
\end_inset
increases
\newline
\begin_inset Formula \( 0<E_{s}<1 \)
\end_inset
\newline
Inelastic
\newline
proportionally less
\newline
\newline
\newline
than
\begin_inset Formula \( P \)
\end_inset
\newline
\newline
Perfectly
\newline
\begin_inset Formula \( Q^{s} \)
\end_inset
doesn't
\newline
\begin_inset Formula \( E_{d}=0 \)
\end_inset
\newline
Inelastic
\newline
change at all
\newline
\newline
\newline
when
\begin_inset Formula \( P \)
\end_inset
changes
\newline
\layout Standard
\latex latex
\backslash par{}
\latex default
\latex latex
\backslash vspace{0.3cm}
\latex default
\layout Standard
Supply Elasticity and Time
\layout Itemize
supply is
\emph on
more
\emph default
elastic over longer time periods, as suppliers can adjust behavior
\layout Slide
\layout Standard
Tax Burdens and Elasticity
\layout Itemize
legal incidence: who writes the check
\layout Itemize
economic incidence: who actually loses purchasing power
\layout Itemize
tax shifting: taxes can be passed on to others.
\begin_deeper
\layout Itemize
forward shifting: passed to consumers through higher prices
\layout Itemize
backward shifting: passed to workers or other suppliers as lower wages or
prices
\end_deeper
\layout Itemize
taxes create
\emph on
disincentives
\emph default
\layout Slide
\layout Standard
Where the Tax Burden Lands
\layout Itemize
inelastic supply
\begin_deeper
\layout Itemize
burden on supplier
\end_deeper
\layout Itemize
inelastic demand
\begin_deeper
\layout Itemize
burden on consumer
\end_deeper
\layout Itemize
elastic supply
\begin_deeper
\layout Itemize
consumers pay burden
\end_deeper
\layout Itemize
elastic demand
\begin_deeper
\layout Itemize
suppliers bear burden
\end_deeper
\the_end
