CHAPTER5ELASTICITYOFDEMAND：5章需求弹性.doc

Chapter 5 Elasticity Of Demand5.1 Introduction Demand elasticities are measures of the responsiveness of _ _ to changes in its own price, in income, in prices of other goods. 5.2 Price Elasticity of Demand Ed(p)It is the responsiveness of Qd of a good to a change in its own _ . Ed(p) = - Exercise 1 1. Is price elasticity of demand positive or negative ? Why ? 2. If the price of both CD and VCD falls from $60 to $50, the sale of VCD rises by 200 discs while CD by 100 only. Can we say the price elasticity of demand of VCD is greater than that of CD ? Why ? A. Calculating the elasticity of demand1. The original price and quantity method ( _ elasticity)Ed(p) = E.g. When P rises from $3 to $4, Qd falls from 14,000 to 12,000 Ed(p) = However, when the deirection of price movement is reversed Ed(p) = It is the weakness of this method. 2. The average price and quantity method ( _ elasticity) Ed(p) = B. Graphic measure of elasticity we consider the % change in Qd and P of a good not the absolute change we do not just consider the _ of demand curve but also the original Qd and P. From Qd/P x P/Qd , we get - Refer to the figure below, the elasticity at point T is then = P P2 D P1 T 0 Q1 Q Exercise 2Which of the following demand curves (D1 or D2) is more elastic ? (a) D1 D2(b) D1 D2(c) D1 D2C. Price elasticity along a linear demand curve and types of price elasticity1. At mid-point M P / D 2. At the vertical intercept D /M 3. At the horizontal intercept D 4. Between D and M 0 D Q 5. Between M and DD. Price elasticity, total revenue and marginal revenue1. Ed(p) 1 (elastic) Ed(p) 1%Qd / / = %P if P falls, PQ / being unchanged i.e., TR / being unchangedif P rises, PQ / being unchanged i.e., TR / being unchanged MR is positive / negative / zero2. Ed(p) / / / = %P if P falls, PQ / being unchanged i.e., TR / being unchangedif P rises, PQ / being unchanged i.e., TR / being unchanged MR is positive / negative / zero Exercise 3 Put the information youve got from part C and D into the following graph. P D=AR 0 Q MRE. Factors affecting price elasticity 1. Availability of substitutes- more substitutes Ed(p) would be _- goods that are habit forming Ed(p) would be _ 2. Degree of necessity- daily necessities, e.g. water Ed(p) is _ 3. Proportion of expenditure in total expenditure- goods that take up a large proportion in total expenditure when P falls, increase in income is _ _ increase in Qd (income effect) Ed(p) is _ 4. Price range- high-price range Ed(p) is _ (not for a constant-elasticity D curve) 5. Adjustment time- it takes time to react to changes in P and switch to other substitutes longer time, _ elastic (second law of demand) 6. Durability - more durable goods _ elastic when P rises, consumers can keep their old ones and postpone the purchase of the new ones5.3 Income Elasticity of Demand Ed(i) It is the responsiveness of Qd of a good to a relative change in _ . Ed(i) = - Exercise 41. Price elasticity is negative, then how about income elasticity ? Ans. (a) Superior / normal goods (b) Inferior goods2. Is it possible for all the goods in an economy to be luxuries ? 5.4 Cross Price Elasticity of Demand Ed(xy) It is the relative responsiveness of a change in Qd of a good to a relative change in the _ of some other goods. Ed(xy) = -1. SubstitutesAn increase in the P of one will e