Elasticity Concepts. CFA level LOS 13

1. Elasticity and Its Applications

11. Computing the Price Elasticity of Demand Demand is price elastic $5 4 Demand Quantity 100 0 50 Price

14. Figure 1 The Price Elasticity of Demand Copyright©2003 Southwestern/Thomson Learning (a) Perfectly Inelastic Demand: Elasticity Equals 0 Quantity 0 Price $5 4 Demand 100 1. An increase in price . . . 2. . . . leaves the quantity demanded unchanged.

15. Figure 1 The Price Elasticity of Demand (b) Inelastic Demand: Elasticity Is Less Than 1 Quantity 0 Price $5 90 Demand 1. A 22% increase in price . . . 2. . . . leads to an 11% decrease in quantity demanded. 4 100

16. Figure 1 The Price Elasticity of Demand Copyright©2003 Southwestern/Thomson Learning (c) Unit Elastic Demand: Elasticity Equals 1 Quantity 0 Price 2. . . . leads to a 22% decrease in quantity demanded. 4 100 $5 80 1. A 22% increase in price . . . Demand

17. Figure 1 The Price Elasticity of Demand (d) Elastic Demand: Elasticity Is Greater Than 1 Quantity 0 Price Demand 4 100 $5 50 1. A 22% increase in price . . . 2. . . . leads to a 67% decrease in quantity demanded.

18. Figure 1 The Price Elasticity of Demand (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price $4 Demand 2. At exactly $4, consumers will buy any quantity. 1. At any price above $4, quantity demanded is zero. 3. At a price below $4, quantity demanded is infinite.

20. Figure 2 Total Revenue Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Demand Q P P × Q = $400 (revenue) $4 100

22. Figure 3 How Total Revenue Changes When Price Changes: Inelastic Demand Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from $1 to $3 … … leads to an Increase in total revenue from $100 to $240 Demand Revenue = $100 Revenue = $240 Demand $1 100 $3 80

24. Figure 4 How Total Revenue Changes When Price Changes: Elastic Demand Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from $4 to $5 … … leads to an decrease in total revenue from $200 to $100 Demand Revenue = $200 $4 50 Demand Revenue = $100 $5 20

25. Elasticity of a Linear Demand Curve

27. Computing Income Elasticity

31. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (a) Perfectly Inelastic Supply: Elasticity Equals 0 Quantity 100 0 Price $5 4 Supply 1. An increase in price . . . 2. . . . leaves the quantity supplied unchanged.

32. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (b) Inelastic Supply: Elasticity Is Less Than 1 Quantity 0 Price 110 $5 100 4 1. A 22% increase in price . . . 2. . . . leads to a 10% increase in quantity supplied. Supply

33. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (c) Unit Elastic Supply: Elasticity Equals 1 Quantity 0 Price 125 $5 100 4 2. . . . leads to a 22% increase in quantity supplied. 1. A 22% increase in price . . . Supply

34. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (d) Elastic Supply: Elasticity Is Greater Than 1 Quantity 0 Price 1. A 22% increase in price . . . 2. . . . leads to a 67% increase in quantity supplied. 4 100 $5 200 Supply

35. Figure 6 The Price Elasticity of Supply Copyright©2003 Southwestern/Thomson Learning (e) Perfectly Elastic Supply: Elasticity Equals Infinity Quantity 0 Price $4 Supply 3. At a price below $4, quantity supplied is zero. 2. At exactly $4, producers will supply any quantity. 1. At any price above $4, quantity supplied is infinite.

40. Figure 8 An Increase in Supply in the Market for Wheat Copyright©2003 Southwestern/Thomson Learning Quantity of Wheat 0 Price of Wheat 3. . . . and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220. Demand S 1 S 2 2. . . . leads to a large fall in price . . . 1. When demand is inelastic, an increase in supply . . . 2 110 $3 100

41. Compute the Price Elasticity of Supply Supply is inelastic