Ec201 PPT Ch06 Pt2 Winter18

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Upcoming Work – EC201
Mon 1/29: Online Hwk (Chap 6 Pt 2) due by midnight
Wed 1/31: Quiz/Assignment 3 (Chap 6) due
Thurs 2/1: Online Hwk (Chap 4) due by midnight
Mon 2/12: MIDTERM – Chap 1-6
Copyright © 2017 Pearson Education, Inc. All Rights Reserved

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Assignment 2
• Overall, nice work!
• Follow directions
• Clearly identify your market2

• Provide reasons for shifts in both supply and demand
curves
• Change in price of good under analysis does not shift
the supply or demand curves
• Labels – missing Q1, Q2, P1, P2
• 3 questions at the end

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Quiz 2
• Overall, nice work!
• Follow directions
• #5 – demand for iPhones, not Google Pixel
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• Make sure your demand curve is downward sloping
• http://cf.linnbenton.edu/bcs/bm/jenkina/upload/Quizzes
_Answer%20KEY.pdf

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Chap 6 - Price Elasticity of Demand

Percentage change in quantity demanded
Price elasticity of demand =
Percentage change in price
• How responsive is quantity demanded to price changes

• How do price changes affect buyer behavior
• To avoid confusion over units, percentage changes are used
• PED is always negative; however, you take the absolute value
of PED to determine if elastic, inelastic, etc.
• Why would a business want to know the PED of its product(s)?

5 5
Price Elasticity of Demand (PED) &

Demand Curves (Table 6.1)
Demand Curve PED
D5 D1 = Perfectly elastic infinity
D4 D2 = Elastic >1
D3 D3 = Unit-elastic 1
D4 = Inelastic <1
D5 = Perfectly inelastic 0
D2
D1 Price Elast. Of
Supply Curves
(Table 6.6) – same
idea, except
sloping upward

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In-class Exercise

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6.4 Other Demand Elasticities
When we examined demand in Chapter 3, we discussed…
• Substitutes: Goods and services that can be used for the same
purpose.
• Complements: Goods and services that are used together.
• It measures the strength of substitute or complement relationships

between goods.

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Table 6.4 Summary of Cross-Price Elasticity of Demand
then the cross-price

If the products are … elasticity of demand Example
will be …
Substitutes positive. Two brands of smartwatches
Smartwatches & smartwatch

Complements negative.
apps
Smartwatches and peanut

Unrelated zero.
butter

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• If price of Good B goes up, then if Good A is a…

• Complement, its Quantity Demanded decreases
• Substitute, its Quantity Demanded increases
• If Goods A and B are…

• Complements, CPED is negative
• Substitute, CPED is positive

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Are pizza and tacos complements or substitutes?

If a 20% price increase in pizza leads to a 10% increase in quantity
demanded for tacos, then what is the cross-price elasticity?
• Initial guess -- complements or substitutes?
• CPED = 10% / 20% = 0.5
• 0.5 > 0 (positive), so confirms that pizza & tacos are substitutes

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Income Elasticity of Demand

When we examined demand in Chapter 3, we also discussed…
• Normal goods: Goods and services for which the quantity demanded
increases as income increases
• Inferior goods: Goods and services for which the quantity demanded
falls as income increases
• Measures responsiveness of the quantity demanded of a good to

changes in consumer income (NOTE: no price)

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Table 6.5 Summary of Income Elasticity of Demand
If the income elasticity of

demand is … then the good is … Example
positive and < 1 normal and a necessity. Bread
positive and > 1 normal and a luxury. Caviar
negative inferior. High-fat meat

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• If consumer income goes up, then if the Good is…

• Inferior, its Quantity Demanded decreases (IED negative)
• Normal, its Quantity Demanded increases (IED positive)
• If consumer income goes up and the Good is normal, then it’s a…

• Necessity, if IED is b/w 0 and 1
• Luxury, if IED > 1

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Calculate the income elasticity of demand if an 20% increase

in income leads to a 30% increase in quantity demanded for
Tesla automobiles.
• IED = 30% / 20% = 1.5
• 1.5 > 0, so means that Tesla cars are Normal goods
• 1.5 > 1, so means that Tesla cars are a Luxury

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Making the Connection: Elasticities of

Alcoholic Beverages
Using sales data, researchers estimated elasticities for various alcoholic
beverages.
Price elasticity of demand for beer −0.30
Cross-price elasticity of demand between beer and wine −0.83
Cross-price elasticity of demand between beer and spirits −0.50
Income elasticity of demand for beer 0.09
Is the demand for beer elastic or inelastic? Inelastic
Are wine or spirits complements or substitutes for beer? Complements
Is beer an inferior or normal good? Normal

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Calculate the income elasticity of demand if an 8 percent

increase in income leads to a 4 percent increase in quantity
demanded for sunglasses.
A) -0.5
B) 0.5 B
C) 2
D) 4

Last year, Rick purchased 60 pounds of potatoes to feed his family of five 17
when his household income was $30,000. This year, his household
income fell to $20,000 and Rick purchased 80 pounds of potatoes. All
else constant, Rick's income elasticity of demand for potatoes is
A) negative, so Rick considers potatoes to be an inferior good. A

B) positive, so Rick considers potatoes to be an inferior good.
C) positive, so Rick considers potatoes to be a normal good and a
necessity.
D) negative, so Rick considers potatoes to be a normal good.

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Calculate the cross-price elasticity if an 10 percent price

increase in hamburgers leads to a 20 percent increase in
quantity demanded for pizza.
A) -0.5
B) 0.5
C) 2 C
D) 5

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Consider the following pairs of items:

a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer
Which of the pairs listed will have a negative cross-price

elasticity?
A) a and b only A
B) c and d only
C) e only
D) a, b, and c only
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6.5 Using Elasticity to Analyze the

Disappearing Family Farm
Over the last century farms have become much more efficient at
producing food.
• This might appear to make farming more profitable, and hence
encourage more people into farming.
But the number of people in farming has fallen substantially --
23 million in 1950  3 million in 2011
• Why have productivity gains in farming led to fewer people
choosing to be farmers?

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Figure 6.4 Elasticity and the Disappearing Family Farm

(1 of 3)
In 1950, U.S. farmers

produced 1.0 billion
bushels of wheat at a
price of $19.53 per
bushel.
Over the next 65
years, rapid
increases in farm
productivity caused a
large shift to the right
in the supply curve
for wheat.

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(2 of 3)
Income elasticity of
demand for wheat is
low, so demand for
wheat increased little
over this period.
Demand for wheat is
also inelastic, so the
large shift in the
supply curve and the
small shift in the
demand curve
resulted in a sharp
decline in the price of
wheat.
23

(3 of 3)
In combination, this
led to a dramatic fall
in the price of the
farmers’ output.
Making a living on a
small farm has
become harder and
harder, so the
increase in output is
supplied by fewer
and fewer large-
scale farmers.

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6.6 The Price Elasticity of Supply and Its

Measurement
Price elasticity of supply is the responsiveness of the quantity

supplied to a change in price, It is very much analogous to price
elasticity of demand

Price elasticity of demand 
Percentage change in quantity supplied
Price elasticity of supply =
So the same sort of calculation methods apply (midpoint

formula, etc.).

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Determinants of the Price Elasticity of

Supply
Price elasticity of supply depends on the ability and willingness of
firms to alter the quantity they produce as price increases.
The time period in question is critically important for determining
the price elasticity of supply.
Suppose the wholesale price of grapes doubled overnight:
• Farmers could do little to increase their quantity immediately;
the initial price elasticity of supply would be close to 0.
• Over time, farmers could plant more fields in grapes; so over
the course of several years, the price elasticity of supply would
rise.

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Making the Connection: Why Are Oil

Prices So Unstable? (1 of 2)
Oil producers
cannot change
output very quickly.
When demand
increases suddenly,
price rises, acting
as a rationing
mechanism for the
increased demand.

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Making the Connection: Why Are Oil

Prices So Unstable? (2 of 2)
On the other hand,
during a recession,
demand for oil falls.
Oil producers cannot
adjust their output
quickly, so the price
falls dramatically.

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Extreme Cases: Perfectly Elastic and

Perfectly Inelastic Supply
If a supply curve is a vertical line, we say it is perfectly inelastic.
• Quantity supplied is completely unresponsive to price.
• Price elasticity of supply equals zero.
• Example: Fixed number of spaces in a parking lot.
If a supply curve is a horizontal line, we say it is perfectly elastic.
• Supply is infinitely responsive to price.
• Price elasticity of supply equals infinity.
• Example: Long-run production of agricultural products is
(approximately) perfectly elastic: at prices above the cost of
production, farmers will supply as much as is demanded.

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Table 6.6 Summary of the Price Elasticity of Supply (1 of 3)
If supply is … then the absolute Blank

value
of price elasticity is …
elastic greater than 1
Inelastic less than 1

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unit elastic equal to 1
perfectly elastic equal to infinity

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perfectly inelastic equal to 0

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Why Is Knowing the Price Elasticity of

Supply Useful?
Knowing the price elasticity of supply can help us to predict the
effect that a change in demand will have:
• When demand increases, we know equilibrium price and
quantity will increase.
• But if supply is inelastic, quantity supplied cannot change much
in response to the demand change, so price will rise a lot.
• If supply is elastic, price will rise much less.

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Figure 6.5 Changes in Price Depend on the Price Elasticity

of Supply (1 of 2)
DemandTypical represents
the typical demand for
parking spaces on a
summer weekend at a
beach resort.
DemandJuly 4 represents
demand on the 4th of July.
When supply is inelastic,
the price increase will be
large.

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Figure 6.5 Changes in Price Depend on the Price Elasticity

of Supply (2 of 2)
If supply is elastic
instead (e.g., suppliers
can open up a large
field for parking for
special events)
 then the resulting

price change will be
much smaller.

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Table 6.7 Summary of Elasticities (1 of 3)
PRICE ELASTICITY OF DEMAND

Formula:
(Q 2  Q1 ) (P2  P1 )
Midpoint formula: 
 Q1  Q 2   P1  P2 
   
 2   2 
Effect on Total Revenue of an

Blank Absolute Value of Price Elasticity Increase in Price
Elastic Greater than 1 Total revenue falls
Inelastic Less than 1 Total revenue rises
Unit elastic Equal to 1 Total revenue unchanged

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Table 6.7 Summary of Elasticities(2 of 3)

CROSS-PRICE ELASTICITY OF DEMAND
Percentage change in quantity demanded of one good

Formula:
Percentage change in price of another good
Value of Cross-Price
Types of Products Elasticity
Substitutes Positive
Complements Negative
Unrelated Zero
INCOME ELASTICITY OF DEMAND

Formula:
Percentage change in income
Types of Products Value of Income Elasticity

Normal and a necessity Positive but less than 1
Normal and a luxury Positive and greater than 1
Inferior Negative

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Table 6.7 Summary of Elasticities(3 of 3)
PRICE ELASTICITY OF SUPPLY
Percentage change in quantity supplied

Formula:
Blank Value of Price Elasticity
Elastic Greater than 1
Inelastic Less than 1
Unit elastic Equal to 1

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The price elasticity of an upward-sloping

supply curve is always
A) positive. A
B) negative.
C) greater than one.
D) impossible to determine.

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Suppose the value of the price elasticity of

supply is 4. What does this mean?
A) A 4 percent increase in the price of the good causes quantity
supplied to increase by 1 percent.
B) A 1 percent increase in the price of the good causes the supply
curve to shift upward by 4 percent.
C) A 1 percent increase in the price of the good causes quantity
supplied to increase by 4 percent. C
D) For every $1 increase in price, quantity supplied increases by 4
units.

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The supply curve on

which price elasticity
changes at every
point is shown in
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.
D

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A perfectly elastic
supply curve is
shown in
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.

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Ec201 PPT Ch06 Pt2 Winter18

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1

Upcoming Work – EC201

Mon 1/29: Online Hwk (Chap 6 Pt 2) due by midnight

Wed 1/31: Quiz/Assignment 3 (Chap 6) due

Thurs 2/1: Online Hwk (Chap 4) due by midnight

Mon 2/12: MIDTERM – Chap 1-6

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

• Overall, nice work!

• Clearly identify your market2

• 3 questions at the end

• Overall, nice work!

• Make sure your demand curve is downward sloping

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Chap 6 - Price Elasticity of Demand

• How responsive is quantity demanded to price changes

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Price Elasticity of Demand (PED) &

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

6.4 Other Demand Elasticities

When we examined demand in Chapter 3, we discussed…

• Complements: Goods and services that are used together.

• It measures the strength of substitute or complement relationships

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Table 6.4 Summary of Cross-Price Elasticity of Demand

then the cross-price

Substitutes positive. Two brands of smartwatches

Smartwatches & smartwatch

Smartwatches and peanut

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

• If price of Good B goes up, then if Good A is a…

• If Goods A and B are…

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Are pizza and tacos complements or substitutes?

• Initial guess -- complements or substitutes?

• CPED = 10% / 20% = 0.5

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Income Elasticity of Demand

• Measures responsiveness of the quantity demanded of a good to

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Table 6.5 Summary of Income Elasticity of Demand

If the income elasticity of

positive and < 1 normal and a necessity. Bread

positive and > 1 normal and a luxury. Caviar

negative inferior. High-fat meat

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

• If consumer income goes up, then if the Good is…

• If consumer income goes up and the Good is normal, then it’s a…

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Calculate the income elasticity of demand if an 20% increase

• IED = 30% / 20% = 1.5

• 1.5 > 0, so means that Tesla cars are Normal goods

• 1.5 > 1, so means that Tesla cars are a Luxury

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Making the Connection: Elasticities of

Is the demand for beer elastic or inelastic? Inelastic

Are wine or spirits complements or substitutes for beer? Complements

Is beer an inferior or normal good? Normal

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

Calculate the income elasticity of demand if an 8 percent

Copyright © 2017 Pearson Education, Inc. All Rights Reserved

A) negative, so Rick considers potatoes to be an inferior good. A

Copyright © 2017 Pearson Education, Inc. All Rights Reserved