(精品)princ-ch05-presentation(2010).ppt

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1、 2010 South-Western,a part of Cengage Learning,all rights reservedC H A P T E R2010 updateElasticity and its ApplicationEconomicsP R I N C I P L E S O FP R I N C I P L E S O FN.Gregory MankiwPremium PowerPoint Slides by Ron Cronovich5In this chapter,look for the answers to these questions:What is el

2、asticity?What kinds of issues can elasticity help us understand?What is the price elasticity of demand?How is it related to the demand curve?How is it related to revenue&expenditure?What is the price elasticity of supply?How is it related to the supply curve?What are the income and cross-price elast

3、icities of demand?1You design websites for local businesses.You charge$200 per website,and currently sell 12 websites per month.Your costs are rising(including the opportunity cost of your time),so you consider raising the price to$250.The law of demand says that you wont sell as many websites if yo

4、u raise your price.How many fewer websites?How much will your revenue fall,or might it increase?A scenario2ELASTICITY AND ITS APPLICATION3ElasticityBasic idea:Elasticity measures how much one variable responds to changes in another variable.One type of elasticity measures how much demand for your we

5、bsites will fall if you raise your price.Definition:Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its determinants.ELASTICITY AND ITS APPLICATION4Price Elasticity of DemandPrice elasticity of demand measures how much Qd responds to a change in P.Price elasticity of de

6、mand=Percentage change in QdPercentage change in PLoosely speaking,it measures the price-sensitivity of buyers demand.ELASTICITY AND ITS APPLICATION5Price Elasticity of DemandPrice elasticity of demand equals PQDQ2P2P1Q1P rises by 10%Q falls by 15%15%10%=1.5Price elasticity of demand=Percentage chan

7、ge in QdPercentage change in PExample:ELASTICITY AND ITS APPLICATION6Price Elasticity of DemandAlong a D curve,P and Q move in opposite directions,which would make price elasticity negative.We will drop the minus sign and report all price elasticities as positive numbers.PQDQ2P2P1Q1Price elasticity

8、of demand=Percentage change in QdPercentage change in PELASTICITY AND ITS APPLICATION7Calculating Percentage ChangesPQD$2508B$20012ADemand for your websitesStandard method of computing the percentage(%)change:end value start valuestart valuex 100%Going from A to B,the%change in P equals($250$200)/$2

9、00=25%ELASTICITY AND ITS APPLICATION8Calculating Percentage ChangesPQD$2508B$20012ADemand for your websitesProblem:The standard method gives different answers depending on where you start.From A to B,P rises 25%,Q falls 33%,elasticity=33/25=1.33From B to A,P falls 20%,Q rises 50%,elasticity=50/20=2.

10、50 ELASTICITY AND ITS APPLICATION9Calculating Percentage ChangesSo,we instead use the midpoint method:end value start valuemidpointx 100%The midpoint is the number halfway between the start&end values,the average of those values.It doesnt matter which value you use as the“start”and which as the“end”

11、you get the same answer either way!ELASTICITY AND ITS APPLICATION10Calculating Percentage ChangesUsing the midpoint method,the%change in P equals$250$200$225x 100%=22.2%The%change in Q equals12 810 x 100%=40.0%The price elasticity of demand equals40/22.2 =1.8A C T I V E L E A R N I N G A C T I V E L

12、 E A R N I N G 1 1 Calculate an elasticity11Use the following information to calculate the price elasticity of demand for hotel rooms:if P=$70,Qd=5000if P=$90,Qd=3000A C T I V E L E A R N I N G A C T I V E L E A R N I N G 1 1 Answers12Use midpoint method to calculate%change in Qd(5000 3000)/4000=50%

13、change in P($90$70)/$80=25%The price elasticity of demand equals50%25%=2.0ELASTICITY AND ITS APPLICATION13What determines price elasticity?To learn the determinants of price elasticity,we look at a series of examples.Each compares two common goods.In each example:Suppose the prices of both goods ris

14、e by 20%.The good for which Qd falls the most(in percent)has the highest price elasticity of demand.Which good is it?Why?What lesson does the example teach us about the determinants of the price elasticity of demand?ELASTICITY AND ITS APPLICATION14EXAMPLE 1:Breakfast cereal vs.SunscreenThe prices of

15、 both of these goods rise by 20%.For which good does Qd drop the most?Why?Breakfast cereal has close substitutes(e.g.,pancakes,Eggo waffles,leftover pizza),so buyers can easily switch if the price rises.Sunscreen has no close substitutes,so consumers would probably not buy much less if its price ris

16、es.Lesson:Price elasticity is higher when close substitutes are available.ELASTICITY AND ITS APPLICATION15EXAMPLE 2:“Blue Jeans”vs.“Clothing”The prices of both goods rise by 20%.For which good does Qd drop the most?Why?For a narrowly defined good such as blue jeans,there are many substitutes(khakis,

17、shorts,Speedos).There are fewer substitutes available for broadly defined goods.(There arent too many substitutes for clothing,other than living in a nudist colony.)Lesson:Price elasticity is higher for narrowly defined goods than broadly defined ones.ELASTICITY AND ITS APPLICATION16EXAMPLE 3:Insuli

18、n vs.Caribbean CruisesThe prices of both of these goods rise by 20%.For which good does Qd drop the most?Why?To millions of diabetics,insulin is a necessity.A rise in its price would cause little or no decrease in demand.A cruise is a luxury.If the price rises,some people will forego it.Lesson:Price

19、 elasticity is higher for luxuries than for necessities.ELASTICITY AND ITS APPLICATION17EXAMPLE 4:Gasoline in the Short Run vs.Gasoline in the Long RunThe price of gasoline rises 20%.Does Qd drop more in the short run or the long run?Why?Theres not much people can do in the short run,other than ride

20、 the bus or carpool.In the long run,people can buy smaller cars or live closer to where they work.Lesson:Price elasticity is higher in the long run than the short run.ELASTICITY AND ITS APPLICATION18The Determinants of Price Elasticity:A SummaryThe price elasticity of demand depends on:the extent to

21、 which close substitutes are availablewhether the good is a necessity or a luxuryhow broadly or narrowly the good is definedthe time horizon elasticity is higher in the long run than the short run ELASTICITY AND ITS APPLICATION19The Variety of Demand CurvesThe price elasticity of demand is closely r

22、elated to the slope of the demand curve.Rule of thumb:The flatter the curve,the bigger the elasticity.The steeper the curve,the smaller the elasticity.Five different classifications of D curves.ELASTICITY AND ITS APPLICATION20Q1P1D“Perfectly inelastic demand”(one extreme case)PQP2P falls by 10%Q cha

23、nges by 0%0%10%=0Price elasticity of demand=%change in Q%change in P=Consumers price sensitivity:D curve:Elasticity:verticalnone0ELASTICITY AND ITS APPLICATION21D“Inelastic demand”PQQ1P1Q2P2Q rises less than 10%10%10%1Price elasticity of demand=%change in Q%change in P=P falls by 10%Consumers price

24、sensitivity:D curve:Elasticity:relatively steeprelatively low 10%10%1Price elasticity of demand=%change in Q%change in P=P falls by 10%Consumers price sensitivity:D curve:Elasticity:relatively flatrelatively high 1ELASTICITY AND ITS APPLICATION24D“Perfectly elastic demand”(the other extreme)PQP1Q1P

25、changes by 0%Q changes by any%any%0%=infinityQ2P2=Consumers price sensitivity:D curve:Elasticity:infinityhorizontalextremePrice elasticity of demand=%change in Q%change in P=ELASTICITY AND ITS APPLICATION25Elasticity of a Linear Demand CurveThe slope of a linear demand curve is constant,but its elas

26、ticity is not.PQ$302010$00204060200%40%=5.0E =67%67%=1.0E =40%200%=0.2E =ELASTICITY AND ITS APPLICATION26Price Elasticity and Total RevenueContinuing our scenario,if you raise your pricefrom$200 to$250,would your revenue rise or fall?Revenue=P x Q A price increase has two effects on revenue:Higher P

27、 means more revenue on each unit you sell.But you sell fewer units(lower Q),due to Law of Demand.Which of these two effects is bigger?It depends on the price elasticity of demand.ELASTICITY AND ITS APPLICATION27Price Elasticity and Total RevenueIf demand is elastic,then price elast.of demand 1%chang

28、e in Q%change in PThe fall in revenue from lower Q is greater than the increase in revenue from higher P,so revenue falls.Revenue=P x Q Price elasticity of demand=Percentage change in QPercentage change in PELASTICITY AND ITS APPLICATION28Price Elasticity and Total RevenueElastic demand(elasticity=1

29、.8)PQD$20012If P=$200,Q=12 and revenue=$2400.When D is elastic,a price increase causes revenue to fall.$2508If P=$250,Q=8 and revenue=$2000.lost revenue due to lower Qincreased revenue due to higher PDemand for your websitesELASTICITY AND ITS APPLICATION29Price Elasticity and Total RevenueIf demand

30、is inelastic,then price elast.of demand 1%change in Q%change in PThe fall in revenue from lower Q is smaller than the increase in revenue from higher P,so revenue rises.In our example,suppose that Q only falls to 10(instead of 8)when you raise your price to$250.Revenue=P x Q Price elasticity of dema

31、nd=Percentage change in QPercentage change in PELASTICITY AND ITS APPLICATION30Price Elasticity and Total RevenueNow,demand is inelastic:elasticity=0.82PQD$20012If P=$200,Q=12 and revenue=$2400.$25010If P=$250,Q=10 and revenue=$2500.When D is inelastic,a price increase causes revenue to rise.lost re

32、venue due to lower Qincreased revenue due to higher PDemand for your websitesA.Pharmacies raise the price of insulin by 10%.Does total expenditure on insulin rise or fall?B.As a result of a fare war,the price of a luxury cruise falls 20%.Does luxury cruise companies total revenue rise or fall?A C T

33、I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Elasticity and expenditure/revenue31A C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Answers32A.Pharmacies raise the price of insulin by 10%.Does total expenditure on insulin rise or fall?Expenditure=P x Q Since demand is inelastic,Q w

34、ill fall less than 10%,so expenditure rises.A C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Answers33B.As a result of a fare war,the price of a luxury cruise falls 20%.Does luxury cruise companies total revenue rise or fall?Revenue=P x QThe fall in P reduces revenue,but Q increases,which

35、 increases revenue.Which effect is bigger?Since demand is elastic,Q will increase more than 20%,so revenue rises.ELASTICITY AND ITS APPLICATION34APPLICATION:Does Drug Interdiction Increase or Decrease Drug-Related Crime?One side effect of illegal drug use is crime:Users often turn to crime to financ

36、e their habit.We examine two policies designed to reduce illegal drug use and see what effects they have on drug-related crime.For simplicity,we assume the total dollar value of drug-related crime equals total expenditure on drugs.Demand for illegal drugs is inelastic,due to addiction issues.ELASTIC

37、ITY AND ITS APPLICATION35D1Policy 1:InterdictionPrice of DrugsQuantity of DrugsS1S2P1Q1P2Q2Interdiction reduces the supply of drugs.Since demand for drugs is inelastic,P rises propor-tionally more than Q falls.Result:an increase in total spending on drugs,and in drug-related crimenew value of drug-r

38、elated crimeinitial value of drug-related crimeELASTICITY AND ITS APPLICATION36Policy 2:EducationPrice of DrugsQuantity of DrugsD1SP1Q1D2P2Q2Education reduces the demand for drugs.P and Q fall.Result:A decrease in total spending on drugs,and in drug-related crime.initial value of drug-related crimen

39、ew value of drug-related crimeELASTICITY AND ITS APPLICATION37Price Elasticity of SupplyPrice elasticity of supply measures how much Qs responds to a change in P.Price elasticity of supply=Percentage change in QsPercentage change in PLoosely speaking,it measures sellers price-sensitivity.Again,use t

40、he midpoint method to compute the percentage changes.ELASTICITY AND ITS APPLICATION38Q2Price Elasticity of SupplyPrice elasticity of supply equals PQSP2Q1P1P rises by 8%Q rises by 16%16%8%=2.0Price elasticity of supply=Percentage change in QsPercentage change in PExample:ELASTICITY AND ITS APPLICATI

41、ON39The Variety of Supply CurvesThe slope of the supply curve is closely related to price elasticity of supply.Rule of thumb:The flatter the curve,the bigger the elasticity.The steeper the curve,the smaller the elasticity.Five different classifications.ELASTICITY AND ITS APPLICATION40S“Perfectly ine

42、lastic”(one extreme)PQQ1P1P2Q changes by 0%0%10%=0Price elasticity of supply=%change in Q%change in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:verticalnone0ELASTICITY AND ITS APPLICATION41S“Inelastic”PQQ1P1Q2P2Q rises less than 10%10%10%1Price elasticity of supply=%change in Q%chan

43、ge in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:relatively steeprelatively low 10%10%1Price elasticity of supply=%change in Q%change in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:relatively flatrelatively high 1ELASTICITY AND ITS APPLICATION44S“Perfectly elastic”

44、(the other extreme)PQP1Q1P changes by 0%Q changes by any%any%0%=infinityPrice elasticity of supply=%change in Q%change in P=Q2P2=Sellers price sensitivity:S curve:Elasticity:horizontalextremeinfinityELASTICITY AND ITS APPLICATION45The Determinants of Supply ElasticityThe more easily sellers can chan

45、ge the quantity they produce,the greater the price elasticity of supply.Example:Supply of beachfront property is harder to vary and thus less elastic than supply of new cars.For many goods,price elasticity of supply is greater in the long run than in the short run,because firms can build new factori

46、es,or new firms may be able to enter the market.A C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Elasticity and changes in equilibrium46The supply of beachfront property is inelastic.The supply of new cars is elastic.Suppose population growth causes demand for both goods to double(at each

47、 price,Qd doubles).For which product will P change the most?For which product will Q change the most?A C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Answers47Beachfront property(inelastic supply):PQD1SQ1P1AWhen supply is inelastic,an increase in demand has a bigger impact on price than o

48、n quantity.D2BQ2P2A C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Answers48New cars(elastic supply):PQD1SQ1P1AWhen supply is elastic,an increase in demand has a bigger impact on quantity than on price.D2Q2P2BELASTICITY AND ITS APPLICATION49SHow the Price Elasticity of Supply Can VaryPQSu

49、pply often becomes less elastic as Q rises,due to capacity limits.$1552512500$31004200elasticity 1elasticity 0.For inferior goods,income elasticity 0(e.g.,an increase in price of beef causes an increase in demand for chicken)For complements,cross-price elasticity 0(e.g.,an increase in price of compu

50、ters causes decrease in demand for software)ELASTICITY AND ITS APPLICATION52Cross-Price Elasticities in the News“As Gas Costs Soar,Buyers Flock to Small Cars”-New York Times,5/2/2008“Gas Prices Drive Students to Online Courses”-Chronicle of Higher Education,7/8/2008“Gas prices knock bicycle sales,re