ACCESS Test Bank for Microeconomics 14th Edition Parkin
n n n n n n n
Chapter
n n n n n n
4 ELASTICITY
n
The Big P ic tur e
nn nn n
Wherenwenhavenbeen:
Thenstudentncannnownusenthendemandnandnsupplynmodelntongeneratenpredictionsnandncannsupplement
nthisnknowledgenwithnthenabilityntonprovidenrichernpredictionsnbasednonnthenelasticitiesnofndemandnand
nsupply.
Wheren wen aren going:
Demand,nsupply,nandndemandnelasticityngetnannextensivenworkoutninnChaptern6,nwherenwenusenthemnton
explainnthendivisionnofnantaxnburdennbetweennbuyernandnsellernandnthenimpactnofnpricencontrolsnandnq
uotas.nHowever,nbeforendoingnthatnanalysis,nwenstudynthenefficiencynandnfairnessnofnmarketsninnChapt
ern5.nStudentsnwillnalsonapplynelasticityninnChaptern12ntondescribendemandninnperfectncompetition.nInn
Chaptern13,nwenstudynthenrelationshipnbetweenntotalnrevenuenandnthenpricenelasticitynofndemandntonsh
ownthatnanmonopolynnevernoperatesnonntheninelasticnpartnofnthendemandncurve.
Ne w in t h e Four t e e n t h E d i t i o n
n n n n n n n n n n
Therenarenonlynanfewnminornchangesntonthisnchapter.nThenchapternopeningnexamplenandnthenEconomicsninnth
enNewsncasenstudynfocusnonnusingnelasticityntondeterminenquantitativeneffects—
hownmuchnthenpricenornquantitynchange—duentonchangesncausednbynthenCovid-19npandemic.
©n2023nPearsonnEducation,nInc.
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, ACCESS Test Bank for Microeconomics 14th Edition Parkin
n n n n n n n
36 C H A P T E nRn 4
Lectur e Notes n n n
Elasticity
• Thenpricenelasticitynofndemandnmeasuresnhownstronglynbuyersnrespondntonanchangeninnthenpricenofnangood.
• Thenpricenelasticitynofndemandncannbenusedntonmakenquantitativenpredictionsnofnhownchangesnaffectnthenprice
nandnquantityndemandednofnangood.
• Thenincomenelasticitynofndemandnmeasuresnhownstronglyndemandersnrespondntonanchangeninnincome,nandnthen
crossnelasticitynofndemandnmeasuresnhownstronglyndemandersnrespondntonthenchangeninnthenpricenofnanotherngood.
• Thenpricenelasticitynofnsupplynmeasuresnhownstronglynproducersnrespondntonanchangeninnthenpricenofnangood.
I. PricenElasticitynofnDemand
• Inngeneral,nelasticitynmeasuresnresponsiveness.nThenpricenelasticitynofndemandnmeasuresnhownresponsivendem
andersnarentonanchangeninnthenpricenofnthengood.nThisninformationnisnoftennusefulnfornbothnbusinessesnandngov
ernmentsnbecausenitncannpredictnthenimpactnofnanpricenchangenonntotalnrevenuenorntotalnexpenditure.
CalculatingnPricenElasticitynofnDemand
• Thenpricenelasticitynofndemandnisnanunits-
freenmeasurenofnthenresponsivenessnofnthenquantityndemandednofnangoodntonanchangeninnitsnpricenwhennallnother
ninfluencesnonnanbuyer’snplansnremainnunchanged.nThenpricenelasticitynofndemandnisnequalntonthenabsolutenval
uenof:
Thenformulasnforncalculatingnallnofnthenelasticitiesninnthentextnarenbasednonnthenarcnelasticitynornmid-
pointnformula,nmeaningnthenpercentagenchangesnarenalwaysncalculatednbasednonnthenaveragenpricen(ornincomeninnthencas
enofnincomenelasticity)nandnaveragenquantitynovernthenrangenofnchange.nIfnyounasknstudentsntoncalculatenelasticities,nitnisni
mportantntonpracticencalculatingnthenpercentagenchangenusingnthenaveragenasnthenbasisnasnitnisnnotnlikelyntonbenfamiliarnD
on’tnbenafraidntonstartnwithnthisnpre-
elasticitynwarmnupntonassessnthensharpnessnofnyournclass.nAsk:n“Supposenthatnthencampusnbookstorenincreasesnthenpricen
ofnanneconomicsntextnfromn$75nton$100.nWhatnisnthenpercentagenincreaseninnprice?”nManynwillnsayn25npercent.nButnusin
gnthenmidpointnformulanthenpercentagenchangenisn($25/$87.50)n×n100,nwhichnisn28.6npercent.
Devisenanmnemonicnfornelasticityncalculations.nManynstudentsnhavenanhardntimenrememberingnwhethernquantitynornpri
cengoesninnthennumeratornofnthenelasticitynformulas.nHaventhenstudentsncreatentheirnownnmnemonic.nSuggestnMcDonal
d’snQuarternPounder™nhamburgers.nIt’snsilly,nbutnitnworks,nremindingnthenstudentnthatnQn(quantity)nappearsnbeforenPn
(price)ninnthenrationofnpercentagenchanges.
• Thendemandnelasticitynformulanyieldsnannegativenvaluenbecausenpricenandnquantitynmoveninnoppositendirec
tions.nHowever,nitnisnthenmagnitude,nornabsolutenvalue,nofnthenmeasurenthatnrevealsnhownresponsiventhenquan
titynchangenhasnbeenntonanpricenchange.nSo,nwenusenthenmagnitudenornthenabsolutenvaluenofnthenpricenelasti
citynofndemand.
• Thentablentonthenrightnhasntwonpointsnonnthendemand
ncurvenfornpizzanfromnanparticularnpizzanparlor.
Price Quantityndemanded
(dollarsnpernpizza) (pizzasnpernweek)
• Thenabsolutenvaluenofnthenpercentnchangeninnqua
14 500
ntityndemandednisn[(500n−n400)nn450]nn100n= 16 400
22.2npercent.
• Thenabsolutenvaluenofnthenpercentagenchangeninnp
ricenisn[($14n−n$16)nn$15]nn100n=n13.3npercent.
• Betweennthesentwonpointsnonnthendemandncurve,nthenpricenelasticitynofndemandnisn22.2%nn13.3%n=n1.67.
Elasticitynisnnotnthensamenasnslope.n Studentsnsometimesnwondernwhynwendon’tnjustnmeasurenthenslopenofnthendeman
dncurventonmeasurenresponsiveness.nPointnoutntonthenstudentsnthatnthenslopenwillnchangenwhennthenunitsnchange.nFor
ninstance,nyouncanncomputenthenslopenofnandemandncurvenwhennthenpricenisnmeasuredninndollarsnandnthennthenslopeno
fnthenexactnsamendemandncurvenwhennthenpricenisnmeasuredninncents.nThenslopenwithnthenpricenmeasuredninncentsnisn100
©n2023nPearsonnEducation.
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,ACCESS Test Bank for Microeconomics 14th Edition Parkin
n n n n n n n
EL nA S T nInCI nTY 37 n
timesnasnlargenasntheninitialnslope.nTellnthenstudentsnthatnitnisnnotnacceptablenfornthenmeasurenofnresponsivenessntonchange
whenevernthenunitsnofnthenpricen(ornofnthenquantity)nchange.
InelasticnandnElasticnDemand
• Ifnthenpricenelasticitynofndemandnisnlessnthann1.0,nthengoodnisnsaidntonhavenanninelasticndemand.nInnthisncase,n
thenpercentagenchangeninnthenquantityndemandednisnlessnthannthenpercentagenchangeninnprice.
• Ifnthenquantityndemandednremainsnconstantnwhennthenpricenchanges,nthennthengoodnisnsaidntonhavenp
erfectlyninelasticndemand.nThenpricenelasticitynofndemandnisn0nandnthengood’sndemandncurvenisnanv
erticalnline.
• Ifnthenpricenelasticitynofndemandnisnequalnton1.0,nthengoodnisnsaidntonhavenanunitnelasticndemand.nInnthis
ncase,nthenpercentagenchangeninnthenquantityndemandednequalsnthenpercentagenchangeninnprice.
• Ifnthenpricenelasticitynofndemandnisngreaternthann1.0,nthengoodnisnsaidntonhavenannelasticndemand.nInnthis
ncase,nthenpercentagenchangeninnthenquantityndemandednexceedsnthenpercentagenchangeninnprice.
• Ifnthenquantityndemandednchangesnbynanninfinitelynlargenpercentageninnresponsentonantinynpricenchange,
nthennthengoodnisnsaidntonhavenperfectlynelasticndemand.
Furniture 1.26
Thenpricenelasticitynofndemandnisninfinite. MotornVehicles 1.14
• Thentablenhasnsomen“real-life”nelasticitiesnfromnthenbook. Clothing 0.64
Oil 0.05
n n n n n n
Thisnapplicationnshowsnreal-
worldnpricenelasticitiesnofndemandnfornanvarietynofngoodsnandnservicesnasnwellnasnantablenwithnvariousnfoodnelasticities.nTh
isndatancannbenanbasenforndiscussionnofnthenfactorsnthatnmightnleadnonenitemntonbenmorenelasticnthannthenothernandnallown
students in real-time to try to explain and apply price elasticity of demand.
EconomicsninnthenNews:nThenElasticitynofnDemandnfornPeanutnButter
Thenpricenelasticitynofndemandnfornpeanutnbutternisnthenbasisnfornthisnapplication.nFurtherndiscussionnofnotherndemandnel
asticitiesnfornpeanutnbutternwillnbenexplorednafternthosenelasticitiesnarenintroduced.
ElasticitynAlongn anLinearnDemandnCurve
• Withnthenexceptionnofnanverticalndemandncurvenandna
nhorizontalndemandncurven(alongnwhichnthenelasticityni
sn0nandninfinite,nrespectively)nthenpricenelasticitynofndeman
dnchangesnwhennmovingnalongnanlinearndemandncurve.
• Asnthenfigurenillustrates,natnpointsnonnthendemandncu
rvenaboventhenmidpoint,nthenpricenelasticitynofndema
ndnisnelasticnwhilenatnpointsnbelownthenmidpoint,nthenp
ricenelasticitynofndemandnisninelastic.nAtnthenmidpoin
t,nthenpricenelasticitynofndemandnisnunitnelastic.
TotalnRevenuenandnElasticity
• Thentotalnrevenuenfromnthensalenofnangoodnequalsn
thenpricenofnthengoodnmultipliednbynthenquantitynsold.
Ifndemandnisnelastic,nan1npercentnpricencutnincreasesnthenquantityn
soldnbynmorenthann1npercentnandntotalnrevenuenincreases.
Ifndemandnisnunitnelastic,nan1npercentnpricencutnincreasesnthenqu
antitynsoldnbyn1npercentnandntotalnrevenuendoesnnotnchange.nIfn
demandnisninelastic,nan1npercentnpricencutnincreasesnthenquantit
ynsoldnbynlessnthann1npercentnandntotalnrevenuendecreases.
• Thentotalnrevenuentestnisnanmethodnofnestimatingnthenpricenelasticitynofndemandnbynobservingnthenchange
ninntotalnrevenuenthatnresultsnfromnanchangeninnpricenwhennallnotherninfluencesnonnthenquantitynsoldnremainnth
ensame.
• Ifnanpricencutnincreasesntotalnrevenue,ndemandnisnelastic.nAndnifnanpricenhikendecreasesntotalnrevenue,
ndemandnisnelastic.
©n2023nPearsonnEducation,nInc.
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, ACCESS Test Bank for Microeconomics 14th Edition Parkin
n n n n n n n
38 C H A P T E nRn 4
• Ifnanpricencutndoesnnotnchangentotalnrevenue,ndemandnisnunitnelastic.nAndnifnanpricenhikendoesnnotnchange
ntotalnrevenue,ndemandnisnunitnelastic.
• Ifnanpricencutndecreasesntotalnrevenue,ndemandnisninelastic.nAndnifnanpricenhikenincreasesntotalnrevenue,n
demandnisninelastic.
• Similarly,nwhennanpricenchanges,nanconsumer’snchangeninnexpenditurendependsnonnthenconsumer’snelasticitynof
ndemand.
• Ifndemandnisnelastic,nthennanpricencutnmeansnthatnexpenditurenonnthenitemnincreases.
• Ifndemandnisninelastic,nthennanpricencutnmeansnthatnexpenditurenonnthenitemndecreases.n
Ifndemandnisnunitnelastic,nthennanpricencutnmeansnthatnexpenditurenonnthenitemndoesnnotnchange.
Howndonchangesninnrevenuenrelatentonelasticitynmathematically?n Whenndemandnisnelastic,nthenabsolutenvaluenofnthenrat
ionofnthenpercentagenchangeninnquantityndemandedntonpercentagenchangeninnpricenmustnbengreaternthannone.nThisnpoin
tnimpliesnthatnthennumeratornofnthenformulanfornthenpricenelasticitynofndemandnmustnbengreaternthannthendenominator.
nInnthatncase,nthenpercentagenchangeninnquantityndemandednisnstrongernthannthenpercentagenchangeninnprice,nsonrevenu
esnwillnchangeninnthensamendirectionnasnthenquantityndemanded.nOnnthenothernhand,nifndemandnisninelastic,nthendenom
inatornofnthenformulanfornthenpricenelasticitynofndemandnmustnbengreaternthannthennumerator.nInnthatncase,nchangesninnr
evenuenwillnchangeninnthensamendirectionnasnthenpricenbecausenthenpercentagenchangeninnpricenisnstrongernthannthenperc
entagenchangeninnquantity.nReviewingnthesenresultsnalsonhelpsnstudentsnunderstandnthenlogicnfornwhyn1nisnthensignifica
ntnvaluenfornthencoefficientnandnthatnthenelasticitynbeingnfarthernawaynfromn1nmeansnthenreactionnisnstronger,nwhethernel
asticnorninelastic.
ThenFactorsnthatnInfluencenthenElasticitynofnDemand
Thenmagnitudenofnthenpricenelasticitynofndemandndependsnon:
• Thenclosenessnofnsubstitutes:nThenclosernandnmorennumerousnthensubstitutesnfornangoodnornservice,nthenmoren
elasticnthendemand.nThisnisncriticalnfornunderstandingndemandninnthenmarketnstructurensectionnlaterninnthenbook.
• Thenproportionnofnincomenspentnonnthengood:nThengreaternthenproportionnofnincomenspentnonnangoodnorn
service,nthenmorenelasticnthendemand.
• Thenamountnofntimenelapsednsincenthenpricenchange:nThenlongernthentimenelapsednsincenthenpricenchange,nt
henmorenelasticnthendemand.
Pricenelasticitynofnneedsnversusnwants:n Necessities,nsuchnasnfoodnornhousing,ngenerallynhaveninelasticndemandnbecausenthe
renarenfewnsubstitutesnfornfoodnandnshelter.nLuxuries,nsuchnasnexoticnvacations,ngenerallynhavenelasticndemand.
Example:nMostnpeople’sndemandnfornsaltnisninelastic,nlargelynbecausenmostnpeoplenspendnanminisculenamountnofntheirnin
comenonnsalt.nHowevernlargenNorthernncities’ndemandnfornsaltnisnsignificantlynmorenelastic.nThesencitiesnusensaltntontrea
tntheirnroadsnafternansnownstorm.nSaltnisnansignificantnfractionnofntheirnbudgets.nBecausenthenproportionnofntheirnincomen
theynspendnonnsaltnisnlarge,nthenpricenelasticitynofndemandnfornthesencitiesnisnmuchnlargernthannthatnofn“ordinary”nconsum
ers.
Howndongasolinenpurchasesnrespondntonchangesninnpricenoverntime?n Whenngasnpricesnrisenfromn$2nton$4,nconsumersni
nitiallynhavenfewnoptionsnavailable.nAtnfirst,nwithnangivenncarnwithnangivenngasnmileage,nhigherngasnpricesndonnotnreducen
thenquantitynofngasnconsumersnpurchasenbynverynmuch.nAsntimenpassesnandngasolinenpricesncontinuentonremainnhigh,n
somenconsumersneventuallynfindnwaysntonadjustntheirngasnpurchasesnbynpurchasingnmorenfuelnefficientncars,ntakingnnewn
jobsnthatnarencloserntontheirnhomes,nornbyntakingnfewernroadntripsnorncarnpooling.
II. MorenElasticitiesnofnDemand
IncomenElasticitynofnDemand
• Thenincomenelasticitynofndemandnisnanmeasurenofnthenresponsivenessnofnthendemandnfornangoodntonan
changeninnthenincome,nothernthingsnremainingnthensame.
• Thenincomenelasticitynofndemandnisnequalnto:
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mynursytest.store
n n n n n n n
Chapter
n n n n n n
4 ELASTICITY
n
The Big P ic tur e
nn nn n
Wherenwenhavenbeen:
Thenstudentncannnownusenthendemandnandnsupplynmodelntongeneratenpredictionsnandncannsupplement
nthisnknowledgenwithnthenabilityntonprovidenrichernpredictionsnbasednonnthenelasticitiesnofndemandnand
nsupply.
Wheren wen aren going:
Demand,nsupply,nandndemandnelasticityngetnannextensivenworkoutninnChaptern6,nwherenwenusenthemnton
explainnthendivisionnofnantaxnburdennbetweennbuyernandnsellernandnthenimpactnofnpricencontrolsnandnq
uotas.nHowever,nbeforendoingnthatnanalysis,nwenstudynthenefficiencynandnfairnessnofnmarketsninnChapt
ern5.nStudentsnwillnalsonapplynelasticityninnChaptern12ntondescribendemandninnperfectncompetition.nInn
Chaptern13,nwenstudynthenrelationshipnbetweenntotalnrevenuenandnthenpricenelasticitynofndemandntonsh
ownthatnanmonopolynnevernoperatesnonntheninelasticnpartnofnthendemandncurve.
Ne w in t h e Four t e e n t h E d i t i o n
n n n n n n n n n n
Therenarenonlynanfewnminornchangesntonthisnchapter.nThenchapternopeningnexamplenandnthenEconomicsninnth
enNewsncasenstudynfocusnonnusingnelasticityntondeterminenquantitativeneffects—
hownmuchnthenpricenornquantitynchange—duentonchangesncausednbynthenCovid-19npandemic.
©n2023nPearsonnEducation,nInc.
mynursytest.store
, ACCESS Test Bank for Microeconomics 14th Edition Parkin
n n n n n n n
36 C H A P T E nRn 4
Lectur e Notes n n n
Elasticity
• Thenpricenelasticitynofndemandnmeasuresnhownstronglynbuyersnrespondntonanchangeninnthenpricenofnangood.
• Thenpricenelasticitynofndemandncannbenusedntonmakenquantitativenpredictionsnofnhownchangesnaffectnthenprice
nandnquantityndemandednofnangood.
• Thenincomenelasticitynofndemandnmeasuresnhownstronglyndemandersnrespondntonanchangeninnincome,nandnthen
crossnelasticitynofndemandnmeasuresnhownstronglyndemandersnrespondntonthenchangeninnthenpricenofnanotherngood.
• Thenpricenelasticitynofnsupplynmeasuresnhownstronglynproducersnrespondntonanchangeninnthenpricenofnangood.
I. PricenElasticitynofnDemand
• Inngeneral,nelasticitynmeasuresnresponsiveness.nThenpricenelasticitynofndemandnmeasuresnhownresponsivendem
andersnarentonanchangeninnthenpricenofnthengood.nThisninformationnisnoftennusefulnfornbothnbusinessesnandngov
ernmentsnbecausenitncannpredictnthenimpactnofnanpricenchangenonntotalnrevenuenorntotalnexpenditure.
CalculatingnPricenElasticitynofnDemand
• Thenpricenelasticitynofndemandnisnanunits-
freenmeasurenofnthenresponsivenessnofnthenquantityndemandednofnangoodntonanchangeninnitsnpricenwhennallnother
ninfluencesnonnanbuyer’snplansnremainnunchanged.nThenpricenelasticitynofndemandnisnequalntonthenabsolutenval
uenof:
Thenformulasnforncalculatingnallnofnthenelasticitiesninnthentextnarenbasednonnthenarcnelasticitynornmid-
pointnformula,nmeaningnthenpercentagenchangesnarenalwaysncalculatednbasednonnthenaveragenpricen(ornincomeninnthencas
enofnincomenelasticity)nandnaveragenquantitynovernthenrangenofnchange.nIfnyounasknstudentsntoncalculatenelasticities,nitnisni
mportantntonpracticencalculatingnthenpercentagenchangenusingnthenaveragenasnthenbasisnasnitnisnnotnlikelyntonbenfamiliarnD
on’tnbenafraidntonstartnwithnthisnpre-
elasticitynwarmnupntonassessnthensharpnessnofnyournclass.nAsk:n“Supposenthatnthencampusnbookstorenincreasesnthenpricen
ofnanneconomicsntextnfromn$75nton$100.nWhatnisnthenpercentagenincreaseninnprice?”nManynwillnsayn25npercent.nButnusin
gnthenmidpointnformulanthenpercentagenchangenisn($25/$87.50)n×n100,nwhichnisn28.6npercent.
Devisenanmnemonicnfornelasticityncalculations.nManynstudentsnhavenanhardntimenrememberingnwhethernquantitynornpri
cengoesninnthennumeratornofnthenelasticitynformulas.nHaventhenstudentsncreatentheirnownnmnemonic.nSuggestnMcDonal
d’snQuarternPounder™nhamburgers.nIt’snsilly,nbutnitnworks,nremindingnthenstudentnthatnQn(quantity)nappearsnbeforenPn
(price)ninnthenrationofnpercentagenchanges.
• Thendemandnelasticitynformulanyieldsnannegativenvaluenbecausenpricenandnquantitynmoveninnoppositendirec
tions.nHowever,nitnisnthenmagnitude,nornabsolutenvalue,nofnthenmeasurenthatnrevealsnhownresponsiventhenquan
titynchangenhasnbeenntonanpricenchange.nSo,nwenusenthenmagnitudenornthenabsolutenvaluenofnthenpricenelasti
citynofndemand.
• Thentablentonthenrightnhasntwonpointsnonnthendemand
ncurvenfornpizzanfromnanparticularnpizzanparlor.
Price Quantityndemanded
(dollarsnpernpizza) (pizzasnpernweek)
• Thenabsolutenvaluenofnthenpercentnchangeninnqua
14 500
ntityndemandednisn[(500n−n400)nn450]nn100n= 16 400
22.2npercent.
• Thenabsolutenvaluenofnthenpercentagenchangeninnp
ricenisn[($14n−n$16)nn$15]nn100n=n13.3npercent.
• Betweennthesentwonpointsnonnthendemandncurve,nthenpricenelasticitynofndemandnisn22.2%nn13.3%n=n1.67.
Elasticitynisnnotnthensamenasnslope.n Studentsnsometimesnwondernwhynwendon’tnjustnmeasurenthenslopenofnthendeman
dncurventonmeasurenresponsiveness.nPointnoutntonthenstudentsnthatnthenslopenwillnchangenwhennthenunitsnchange.nFor
ninstance,nyouncanncomputenthenslopenofnandemandncurvenwhennthenpricenisnmeasuredninndollarsnandnthennthenslopeno
fnthenexactnsamendemandncurvenwhennthenpricenisnmeasuredninncents.nThenslopenwithnthenpricenmeasuredninncentsnisn100
©n2023nPearsonnEducation.
mynursytest.store
,ACCESS Test Bank for Microeconomics 14th Edition Parkin
n n n n n n n
EL nA S T nInCI nTY 37 n
timesnasnlargenasntheninitialnslope.nTellnthenstudentsnthatnitnisnnotnacceptablenfornthenmeasurenofnresponsivenessntonchange
whenevernthenunitsnofnthenpricen(ornofnthenquantity)nchange.
InelasticnandnElasticnDemand
• Ifnthenpricenelasticitynofndemandnisnlessnthann1.0,nthengoodnisnsaidntonhavenanninelasticndemand.nInnthisncase,n
thenpercentagenchangeninnthenquantityndemandednisnlessnthannthenpercentagenchangeninnprice.
• Ifnthenquantityndemandednremainsnconstantnwhennthenpricenchanges,nthennthengoodnisnsaidntonhavenp
erfectlyninelasticndemand.nThenpricenelasticitynofndemandnisn0nandnthengood’sndemandncurvenisnanv
erticalnline.
• Ifnthenpricenelasticitynofndemandnisnequalnton1.0,nthengoodnisnsaidntonhavenanunitnelasticndemand.nInnthis
ncase,nthenpercentagenchangeninnthenquantityndemandednequalsnthenpercentagenchangeninnprice.
• Ifnthenpricenelasticitynofndemandnisngreaternthann1.0,nthengoodnisnsaidntonhavenannelasticndemand.nInnthis
ncase,nthenpercentagenchangeninnthenquantityndemandednexceedsnthenpercentagenchangeninnprice.
• Ifnthenquantityndemandednchangesnbynanninfinitelynlargenpercentageninnresponsentonantinynpricenchange,
nthennthengoodnisnsaidntonhavenperfectlynelasticndemand.
Furniture 1.26
Thenpricenelasticitynofndemandnisninfinite. MotornVehicles 1.14
• Thentablenhasnsomen“real-life”nelasticitiesnfromnthenbook. Clothing 0.64
Oil 0.05
n n n n n n
Thisnapplicationnshowsnreal-
worldnpricenelasticitiesnofndemandnfornanvarietynofngoodsnandnservicesnasnwellnasnantablenwithnvariousnfoodnelasticities.nTh
isndatancannbenanbasenforndiscussionnofnthenfactorsnthatnmightnleadnonenitemntonbenmorenelasticnthannthenothernandnallown
students in real-time to try to explain and apply price elasticity of demand.
EconomicsninnthenNews:nThenElasticitynofnDemandnfornPeanutnButter
Thenpricenelasticitynofndemandnfornpeanutnbutternisnthenbasisnfornthisnapplication.nFurtherndiscussionnofnotherndemandnel
asticitiesnfornpeanutnbutternwillnbenexplorednafternthosenelasticitiesnarenintroduced.
ElasticitynAlongn anLinearnDemandnCurve
• Withnthenexceptionnofnanverticalndemandncurvenandna
nhorizontalndemandncurven(alongnwhichnthenelasticityni
sn0nandninfinite,nrespectively)nthenpricenelasticitynofndeman
dnchangesnwhennmovingnalongnanlinearndemandncurve.
• Asnthenfigurenillustrates,natnpointsnonnthendemandncu
rvenaboventhenmidpoint,nthenpricenelasticitynofndema
ndnisnelasticnwhilenatnpointsnbelownthenmidpoint,nthenp
ricenelasticitynofndemandnisninelastic.nAtnthenmidpoin
t,nthenpricenelasticitynofndemandnisnunitnelastic.
TotalnRevenuenandnElasticity
• Thentotalnrevenuenfromnthensalenofnangoodnequalsn
thenpricenofnthengoodnmultipliednbynthenquantitynsold.
Ifndemandnisnelastic,nan1npercentnpricencutnincreasesnthenquantityn
soldnbynmorenthann1npercentnandntotalnrevenuenincreases.
Ifndemandnisnunitnelastic,nan1npercentnpricencutnincreasesnthenqu
antitynsoldnbyn1npercentnandntotalnrevenuendoesnnotnchange.nIfn
demandnisninelastic,nan1npercentnpricencutnincreasesnthenquantit
ynsoldnbynlessnthann1npercentnandntotalnrevenuendecreases.
• Thentotalnrevenuentestnisnanmethodnofnestimatingnthenpricenelasticitynofndemandnbynobservingnthenchange
ninntotalnrevenuenthatnresultsnfromnanchangeninnpricenwhennallnotherninfluencesnonnthenquantitynsoldnremainnth
ensame.
• Ifnanpricencutnincreasesntotalnrevenue,ndemandnisnelastic.nAndnifnanpricenhikendecreasesntotalnrevenue,
ndemandnisnelastic.
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, ACCESS Test Bank for Microeconomics 14th Edition Parkin
n n n n n n n
38 C H A P T E nRn 4
• Ifnanpricencutndoesnnotnchangentotalnrevenue,ndemandnisnunitnelastic.nAndnifnanpricenhikendoesnnotnchange
ntotalnrevenue,ndemandnisnunitnelastic.
• Ifnanpricencutndecreasesntotalnrevenue,ndemandnisninelastic.nAndnifnanpricenhikenincreasesntotalnrevenue,n
demandnisninelastic.
• Similarly,nwhennanpricenchanges,nanconsumer’snchangeninnexpenditurendependsnonnthenconsumer’snelasticitynof
ndemand.
• Ifndemandnisnelastic,nthennanpricencutnmeansnthatnexpenditurenonnthenitemnincreases.
• Ifndemandnisninelastic,nthennanpricencutnmeansnthatnexpenditurenonnthenitemndecreases.n
Ifndemandnisnunitnelastic,nthennanpricencutnmeansnthatnexpenditurenonnthenitemndoesnnotnchange.
Howndonchangesninnrevenuenrelatentonelasticitynmathematically?n Whenndemandnisnelastic,nthenabsolutenvaluenofnthenrat
ionofnthenpercentagenchangeninnquantityndemandedntonpercentagenchangeninnpricenmustnbengreaternthannone.nThisnpoin
tnimpliesnthatnthennumeratornofnthenformulanfornthenpricenelasticitynofndemandnmustnbengreaternthannthendenominator.
nInnthatncase,nthenpercentagenchangeninnquantityndemandednisnstrongernthannthenpercentagenchangeninnprice,nsonrevenu
esnwillnchangeninnthensamendirectionnasnthenquantityndemanded.nOnnthenothernhand,nifndemandnisninelastic,nthendenom
inatornofnthenformulanfornthenpricenelasticitynofndemandnmustnbengreaternthannthennumerator.nInnthatncase,nchangesninnr
evenuenwillnchangeninnthensamendirectionnasnthenpricenbecausenthenpercentagenchangeninnpricenisnstrongernthannthenperc
entagenchangeninnquantity.nReviewingnthesenresultsnalsonhelpsnstudentsnunderstandnthenlogicnfornwhyn1nisnthensignifica
ntnvaluenfornthencoefficientnandnthatnthenelasticitynbeingnfarthernawaynfromn1nmeansnthenreactionnisnstronger,nwhethernel
asticnorninelastic.
ThenFactorsnthatnInfluencenthenElasticitynofnDemand
Thenmagnitudenofnthenpricenelasticitynofndemandndependsnon:
• Thenclosenessnofnsubstitutes:nThenclosernandnmorennumerousnthensubstitutesnfornangoodnornservice,nthenmoren
elasticnthendemand.nThisnisncriticalnfornunderstandingndemandninnthenmarketnstructurensectionnlaterninnthenbook.
• Thenproportionnofnincomenspentnonnthengood:nThengreaternthenproportionnofnincomenspentnonnangoodnorn
service,nthenmorenelasticnthendemand.
• Thenamountnofntimenelapsednsincenthenpricenchange:nThenlongernthentimenelapsednsincenthenpricenchange,nt
henmorenelasticnthendemand.
Pricenelasticitynofnneedsnversusnwants:n Necessities,nsuchnasnfoodnornhousing,ngenerallynhaveninelasticndemandnbecausenthe
renarenfewnsubstitutesnfornfoodnandnshelter.nLuxuries,nsuchnasnexoticnvacations,ngenerallynhavenelasticndemand.
Example:nMostnpeople’sndemandnfornsaltnisninelastic,nlargelynbecausenmostnpeoplenspendnanminisculenamountnofntheirnin
comenonnsalt.nHowevernlargenNorthernncities’ndemandnfornsaltnisnsignificantlynmorenelastic.nThesencitiesnusensaltntontrea
tntheirnroadsnafternansnownstorm.nSaltnisnansignificantnfractionnofntheirnbudgets.nBecausenthenproportionnofntheirnincomen
theynspendnonnsaltnisnlarge,nthenpricenelasticitynofndemandnfornthesencitiesnisnmuchnlargernthannthatnofn“ordinary”nconsum
ers.
Howndongasolinenpurchasesnrespondntonchangesninnpricenoverntime?n Whenngasnpricesnrisenfromn$2nton$4,nconsumersni
nitiallynhavenfewnoptionsnavailable.nAtnfirst,nwithnangivenncarnwithnangivenngasnmileage,nhigherngasnpricesndonnotnreducen
thenquantitynofngasnconsumersnpurchasenbynverynmuch.nAsntimenpassesnandngasolinenpricesncontinuentonremainnhigh,n
somenconsumersneventuallynfindnwaysntonadjustntheirngasnpurchasesnbynpurchasingnmorenfuelnefficientncars,ntakingnnewn
jobsnthatnarencloserntontheirnhomes,nornbyntakingnfewernroadntripsnorncarnpooling.
II. MorenElasticitiesnofnDemand
IncomenElasticitynofnDemand
• Thenincomenelasticitynofndemandnisnanmeasurenofnthenresponsivenessnofnthendemandnfornangoodntonan
changeninnthenincome,nothernthingsnremainingnthensame.
• Thenincomenelasticitynofndemandnisnequalnto:
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