1、R. GLENNHUBBARDANTHONY PATRICKOBRIENFIFTH EDITION 2015 Pearson Education, Inc. 2 2015 Pearson Education, Inc.Chapter Outline andLearning Objectives6.1 The Price Elasticity of Demand and Its Measurement6.2 The Determinants of the Price Elasticity of Demand6.3 The Relationship between Price Elasticity
2、 of Demand and Total Revenue6.4 Other Demand Elasticities6.5 Using Elasticity to Analyze the Disappearing Family Farm6.6 The Price Elasticity of Supply and Its MeasurementCHAPTER6 Elasticity: The Responsiveness of Demand and Supply3 2015 Pearson Education, Inc.Do People Respond to Changes in the Pri
3、ce of Gasoline?Some argue that people dont vary the quantity of gasoline they buy as the price changes. Do you think this is correct?From September 2011 to September 2012, the price of gasoline rose by about 7% ($3.66 per gallon to $3.91 per gallon). Gasoline consumption fell by about 5%.People do r
4、espond to incentives, changing their behavior as prices, incomes, and prices of related goods change.This chapter explores these behavioral changes.LEARNING OBJECTIVE4 2015 Pearson Education, Inc.The Price Elasticity of Demand and Its Measurement6.1Define price elasticity of demand and understand ho
5、w to measure it.5 2015 Pearson Education, Inc.Measuring Responsiveness to Price ChangesAlthough we saw consumers did change the amount of gasoline they bought, they didnt appear to change it by very much.How can we come up with a sensible way to measure how much quantity changes when price changes?O
6、ne idea is to look at the slope of the demand curve. But this wont work, since the value of the slope depends on the units used to measure on the axes.6 2015 Pearson Education, Inc.Price Elasticity of DemandA better way to measure responsiveness of quantity demanded is to think in terms of percentag
7、e changes. This avoids the problem with units of measurement.Although the slope and price elasticity of demand are related, they are not the same thing.Since price and quantity change in opposite directions on the demand curve, the price elasticity of demand is a negative number. However we often re
8、fer to “more negative” elasticities as being “larger” or “higher”.7 2015 Pearson Education, Inc.Price Elasticity of Demand TerminologyA “large” value for the price elasticity of demand means that quantity demanded changes a lot in response to a price change.Formally, we say demand is price elastic i
9、f its price elasticity of demand is larger (in absolute value) than 1. So a 10% increase in price would result in a greater than 10% decrease in quantity demanded.Demand is price inelastic if its price elasticity of demand is smaller (in absolute value) than 1. That is, close to zero, indicating tha
10、t quantity demanded changes little in response to a price change.Demand is unit price elastic if the price elasticity of demand is exactly equal to (negative) 1.8 2015 Pearson Education, Inc.Elastic and Inelastic DemandAlong D1, cutting the price from $4.00 to $3.70 increases the number of gallons s
11、old from 1,000 per day to 1,200 per day, so demand is elastic between point A and point B. Along D2, cutting the price from $4.00 to $3.70 increases the number of gallons sold from 1,000 per day only to 1,050 per day, so demand is inelastic between point A and point C. Elastic and inelastic demandFi
12、gure 6.19 2015 Pearson Education, Inc.Percentage Changes and the Midpoint formulaPercentage changes have the unfortunate characteristic that the percentage change from A to B is not the negative of the percentage change from B to A.Example: On the previous slide, from point A to point B, quantity in
13、creased from 1000 to 1200, an increase of 20%.However from B to A, quantity decreases by 16.7%.This would mean the elasticity from A to B was different from the elasticity from B to A, an undesirable characteristic.To avoid this, we calculate percentage changes using the midpoint formula: 10 2015 Pe
14、arson Education, Inc.The Midpoint FormulaThe midpoint formula avoids the confusion of whether we are going from A to B or from B to A: we use the average of A and B in the denominator instead of choosing one of them.Price elasticity of demand becomes:The first term is the percentage change in quantity, using the midpoint formula.The second term is the percentage change in price, using the midpoint formula.
