Bài giảng Managerial Economics - Chapter 6 Elasticity and Demand

Chapter 6Elasticity and DemandP & Q are inversely related by the law of demand so E is always negativeThe larger the absolute value of E, the more sensitive buyers are to a change in pricePrice Elasticity of Demand (E)•Measures responsiveness or sensitivity of consumers to changes in the price of a good2Price Elasticity of Demand (E)ElasticityResponsivenessEElasticUnitary ElasticInelasticTable 6.13Price Elasticity of Demand (E)Percentage change in quantity demanded can be predicted for a given percentage change in price as:%Qd = %P x EPercentage change in price required for a given change in quantity demanded can be predicted as:%P = %Qd ÷ E4Price Elasticity & Total RevenueElasticQuantity-effect dominatesUnitary elasticNo dominant effectInelasticPrice-effect dominatesPrice risesPrice fallsTR fallsTR risesNo change in TR No change in TR TR risesTR fallsTable 6.25Factors Affecting Price Elasticity of DemandAvailability of substitutes The better & more numerous the substitutes for a good, the more elastic is demandPercentage of consumer’s budgetThe greater the percentage of the consumer’s budget spent on the good, the more elastic is demandTime period of adjustmentThe longer the time period consumers have to adjust to price changes, the more elastic is demand6Calculating Price Elasticity of DemandPrice elasticity can be calculated by multiplying the slope of demand (Q/P) times the ratio of price to quantity (P/Q)7Calculating Price Elasticity of DemandPrice elasticity can be measured at an interval (or arc) along demand, or at a specific point on the demand curveIf the price change is relatively small, a point calculation is suitableIf the price change spans a sizable arc along the demand curve, the interval calculation provides a better measure8Computation of Elasticity Over an IntervalWhen calculating price elasticity of demand over an interval of demand, use the interval or arc elasticity formula9Computation of Elasticity at a PointWhen calculating price elasticity at a point on demand, multiply the slope of demand (Q/P), computed at the point of measure, times the ratio P/Q, using the values of P and Q at the point of measureMethod of measuring point elasticity depends on whether demand is linear or curvilinear10Point Elasticity When Demand is Linear11Point Elasticity When Demand is LinearCompute elasticity using either of the two formulas below which give the same value for E12Point Elasticity When Demand is CurvilinearCompute elasticity using either of two equivalent formulas below13Elasticity (Generally) Varies Along a Demand CurveFor linear demand, price and Evary directlyThe higher the price, the more elastic is demandThe lower the price, the less elastic is demandFor curvilinear demand, no general rule about the relation between price and quantity14Constant Elasticity of Demand (Figure 6.3)15Marginal RevenueMarginal revenue (MR) is the change in total revenue per unit change in outputSince MR measures the rate of change in total revenue as quantity changes, MR is the slope of the total revenue (TR) curve 16Demand & Marginal Revenue (Table 6.3)Unit sales (Q)PriceTR = P  Q MR = TR/Q0$4.501 4.002 3.503 3.104 2.805 2.406 2.007 1.50$ 0 $4.00 $7.00 $9.30 $11.20 $12.00 $12.00 $10.50 -- $4.00 $3.00 $2.30 $1.90 $0.80 $0 $-1.50 17Demand, MR, & TR (Figure 6.4)Panel APanel B18Demand & Marginal RevenueWhen inverse demand is linear, P = A + BQ (A > 0, B 0Elastic (E> 1)MR = 0Unit elastic (E= 1)MR 1)Table 6.4TR decreases as Q increases (P decreases)TR is maximizedTR increases as Q increases (P decreases)21Marginal Revenue & Price ElasticityFor all demand & marginal revenue curves, the relation between marginal revenue, price, & elasticity can be expressed as22Income ElasticityIncome elasticity (EM) measures the responsiveness of quantity demanded to changes in income, holding the price of the good & all other demand determinants constantPositive for a normal goodNegative for an inferior good23Cross-Price ElasticityCross-price elasticity (EXY) measures the responsiveness of quantity demanded of good X to changes in the price of related good Y, holding the price of good X & all other demand determinants for good X constantPositive when the two goods are substitutesNegative when the two goods are complements24Interval Elasticity MeasuresTo calculate interval measures of income & cross-price elasticities, the following formulas can be employed25Point Elasticity Measures26