© 2009 South-Western, a part of Cengage Learning, all rights reserved C H A P T E R Elasticity and its Application 탄력성과 그 응용 E conomics P R I N C I P L.

Presentation on theme: "© 2009 South-Western, a part of Cengage Learning, all rights reserved C H A P T E R Elasticity and its Application 탄력성과 그 응용 E conomics P R I N C I P L."— Presentation transcript:

1 © 2009 South-Western, a part of Cengage Learning, all rights reserved C H A P T E R Elasticity and its Application 탄력성과 그 응용 E conomics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 5

2 In this chapter, look for the answers to these questions:  What is elasticity? What kinds of issues can elasticity help us understand? 탄력성이란 ? 탄력성은 어떤 문제를 이해하는 데 도움이 되는가 ?  What is the price elasticity of demand? 수요의 가격탄력성이란 ? How is it related to the demand curve? 수요곡선과 어떻게 관련되는가 ? How is it related to revenue & expenditure? 수입 및 지출과는 어떻게 관련되는가 ?  What is the price elasticity of supply? 공급의 가격탄력성이란 ? How is it related to the supply curve? 공급곡선과 어떻게 관련되는가 ?  What are the income and cross-price elasticities of demand? 수요의 소득탄력성 및 수요의 교차탄력성이란 ? 1

3 You design websites for local businesses. 당신은 지역업체들에게 웹사이트를 디자인해준다. You charge $200 per website, and currently sell 12 websites per month. 웹사이트당 $200 를 받는데 현재 1 달에 12 개를 판다. Your costs are rising (including the opportunity cost of your time), so you consider raising the price to $250. ( 당신의 시간비용을 포함한 ) 비용이 오르고 있어 가격을 $250 로 올리는 것을 고려하고 있다. The law of demand says that you won’t sell as many websites if you raise your price. 수요의 법칙에 의하면, 가격을 올리면 종전처럼 많이 팔지 못할 것이다. How many fewer websites? How much will your revenue fall, or might it increase? 얼마나 적게 팔까 ? 수입은 얼마나 감소할까, 아니면 증가할 수도 있을까 ? You design websites for local businesses. 당신은 지역업체들에게 웹사이트를 디자인해준다. You charge $200 per website, and currently sell 12 websites per month. 웹사이트당 $200 를 받는데 현재 1 달에 12 개를 판다. Your costs are rising (including the opportunity cost of your time), so you consider raising the price to $250. ( 당신의 시간비용을 포함한 ) 비용이 오르고 있어 가격을 $250 로 올리는 것을 고려하고 있다. The law of demand says that you won’t sell as many websites if you raise your price. 수요의 법칙에 의하면, 가격을 올리면 종전처럼 많이 팔지 못할 것이다. How many fewer websites? How much will your revenue fall, or might it increase? 얼마나 적게 팔까 ? 수입은 얼마나 감소할까, 아니면 증가할 수도 있을까 ? A scenario… 2

4 ELASTICITY AND ITS APPLICATION 3 Elasticity 탄력성  Basic idea: 기본개념 Elasticity measures how much one variable responds to changes in another variable. 탄력성은 한 변수가 다른 변수의 변화에 얼마나 크게 반응하는가를 측정한다.  One type of elasticity measures how much demand for your websites will fall if you raise your price. 가격을 올리면 웹사이트에 대한 수요가 얼마나 떨어질 것인가도 탄력성의 하나  Definition: 정의 Elasticity is a numerical measure of the responsiveness of Q d or Q s to one of its determinants. 탄력성이란 수요량 또는 공급량이 그 결정요인 중 하나에 대해 반응하는 정도를 숫자로 측정한 것

5 ELASTICITY AND ITS APPLICATION 4 Price Elasticity of Demand  Price elasticity of demand measures how much Q d responds to a change in P. 수요의 가격탄력성은 수요량이 가격 변화에 얼마나 반응하는가를 측정 Price elasticity of demand = Percentage change in Q d Percentage change in P  Loosely speaking, it measures the price-sensitivity of buyers’ demand. 쉽게 말해, 구매자 수요의 가격 민감도를 측정

6 ELASTICITY AND ITS APPLICATION 5 Price Elasticity of Demand Price elasticity of demand equals P Q D Q2Q2 P2P2 P1P1 Q1Q1 P rises by 10% Q falls by 15% 15% 10% = 1.5 Price elasticity of demand = Percentage change in Q d Percentage change in P Example:

7 ELASTICITY AND ITS APPLICATION 6 Price Elasticity of Demand Along a D curve, P and Q move in opposite directions, which would make price elasticity negative. 수요곡선상에서 P 와 Q 는 반대방향으로 움직이므로 가격탄력성 값은 마이너스 We will drop the minus sign and report all price elasticities as positive numbers. 모든 가격탄력성은 마이너스 부호를 빼고 표시 Along a D curve, P and Q move in opposite directions, which would make price elasticity negative. 수요곡선상에서 P 와 Q 는 반대방향으로 움직이므로 가격탄력성 값은 마이너스 We will drop the minus sign and report all price elasticities as positive numbers. 모든 가격탄력성은 마이너스 부호를 빼고 표시 P Q D Q2Q2 P2P2 P1P1 Q1Q1 Price elasticity of demand = Percentage change in Q d Percentage change in P

8 ELASTICITY AND ITS APPLICATION 7 Calculating Percentage Changes P Q D $250 8 B $200 12 A Demand for your websites Standard method of computing the percentage (%) change: % 변화를 계산하는 표준 방식 end value – start value start value x 100% Going from A to B, the % change in P equals ($250–$200)/$200 = 25%

9 ELASTICITY AND ITS APPLICATION 8 Calculating Percentage Changes P Q D $250 8 B $200 12 A Demand for your websites Problem: The standard method gives different answers depending on where you start. 표준방식으로 계산하면 어디서 시작하느냐에 따라 답이 달라짐 From A to B, P rises 25%, Q falls 33%, elasticity = 33/25 = 1.33 From B to A, P falls 20%, Q rises 50%, elasticity = 50/20 = 2.50

10 ELASTICITY AND ITS APPLICATION 9 Calculating Percentage Changes  So, we instead use the midpoint method: 중간점 방식 end value – start value midpoint x 100%  The midpoint is the number halfway between the start & end values, the average of those values. 중간점은 최초값과 최종값의 중간, 즉 평균  It doesn’t matter which value you use as the “start” and which as the “end” – you get the same answer either way! 어느 것을 최초값으로 사용하든 상관없이 양방향 동일한 답을 얻게 됨

11 ELASTICITY AND ITS APPLICATION 10 Calculating Percentage Changes  Using the midpoint method, the % change in P equals 중간점 방식을 이용하면 P 의 % 변화는 $250 – $200 $225 x 100% = 22.2%  The % change in Q equals Q 의 % 변화는 12 – 8 10 x 100% = 40.0%  The price elasticity of demand equals 수요의 가격탄력성은 40/22.2 = 1.8

12 A C T I V E L E A R N I N G 1 Calculate an elasticity 11 Use the following information to calculate the price elasticity of demand for hotel rooms: if P = $70, Q d = 5000 if P = $90, Q d = 3000

13 A C T I V E L E A R N I N G 1 Answers 12 Use midpoint method to calculate % change in Q d (5000 – 3000)/4000 = 50% % change in P ($90 – $70)/$80 = 25% The price elasticity of demand equals 50% 25% = 2.0

14 ELASTICITY AND ITS APPLICATION 13 What determines price elasticity? To learn the determinants of price elasticity, we look at a series of examples. 가격탄력성의 결정요인을 학습하기 위해 몇가지 예를 살펴봄 Each compares two common goods. 각 예는 평범한 두 재화를 비교 In each example:  Suppose the prices of both goods rise by 20%. 두 재화 모두 가격이 20% 상승한다고 가정  The good for which Q d falls the most (in percent) has the highest price elasticity of demand. Which good is it? Why? 수요량이 가장 크게 감소하는 재화가 가격탄력성이 가장 높은데, 어느 재화인가 ? 왜 그런가 ?  What lesson does the example teach us about the determinants of the price elasticity of demand? 이 예를 통해 수요의 가격탄력성의 결정요인에 관해 무엇을 배울 수 있는가 ?

15 ELASTICITY AND ITS APPLICATION 14 EXAMPLE 1: Breakfast cereal vs. Sunscreen  The prices of both of these goods rise by 20%. For which good does Q d drop the most? Why? 어느 재화의 수요량이 크게 감소하는가 ? 왜 그런가 ?  Breakfast cereal has close substitutes (e.g., pancakes, Eggo waffles, leftover pizza), so buyers can easily switch if the price rises. 아침식사용 시리얼은 밀접한 대체재들이 있으므로 가격이 오르면 다른 재화로 쉽게 전환 가능  Sunscreen has no close substitutes, so consumers would probably not buy much less if its price rises. 선스크린은 밀접한 대체재가 없고, 따라서 가격이 올라도 크게 줄일 수 없을 것  Lesson: Price elasticity is higher when close substitutes are available. 밀접한 대체재가 있으면 가격탄력성이 높다

16 ELASTICITY AND ITS APPLICATION 15 EXAMPLE 2: “Blue Jeans” vs. “Clothing” 청바지 vs. 의류  The prices of both goods rise by 20%. For which good does Q d drop the most? Why?  For a narrowly defined good such as blue jeans, there are many substitutes (khakis, shorts, Speedos). 청바지처럼 좁게 정의된 재화는 많은 대체재를 가짐  There are fewer substitutes available for broadly defined goods. 넓게 정의된 재화는 대체재를 구하기 어려움 (There aren’t too many substitutes for clothing, other than living in a nudist colony.) 나체촌이 아니라면 의류의 대체재는 별로 없을 것  Lesson: Price elasticity is higher for narrowly defined goods than broadly defined ones. 좁게 정의된 재화가 넓게 정의된 재화보다 가격탄력성이 높음

17 ELASTICITY AND ITS APPLICATION 16 EXAMPLE 3: Insulin vs. Caribbean Cruises  The prices of both of these goods rise by 20%. For which good does Q d drop the most? Why?  To millions of diabetics, insulin is a necessity. A rise in its price would cause little or no decrease in demand. 당뇨병 환자에게 인슐린은 필수재임. 가격이 올라도 수요는 거의 변화가 없을 것  A cruise is a luxury. If the price rises, some people will forego it. 크루즈 여행은 사치재임. 가격이 오르면 일부 사람들은 포기할 것  Lesson: Price elasticity is higher for luxuries than for necessities. 사치재가 필수재보다 가격탄력성이 높음

18 ELASTICITY AND ITS APPLICATION 17 EXAMPLE 4: Gasoline in the Short Run vs. Gasoline in the Long Run  The price of gasoline rises 20%. Does Q d drop more in the short run or the long run? Why? 수요량이 단기에 더 많이 감소하는가 아니면 장기에 더 많이 감소하는가 ?  There’s not much / people can do in the short run, other than ride the bus or carpool. 단기적으로는 버스를 타거나 카풀 외에는 할 수 있는 일이 별로 없음  In the long run, people can buy smaller cars or live closer to where they work. 장기적으로는 작은 차를 사거나 직장 근처에 거주할 수 있음  Lesson: Price elasticity is higher in the long run than the short run. 단기보다 장기에 가격탄력성이 높음

19 ELASTICITY AND ITS APPLICATION 18 The Determinants of Price Elasticity: A Summary The price elasticity of demand depends on:  the extent to which close substitutes are available  whether the good is a necessity or a luxury  how broadly or narrowly the good is defined  the time horizon – elasticity is higher in the long run than the short run The price elasticity of demand depends on:  the extent to which close substitutes are available  whether the good is a necessity or a luxury  how broadly or narrowly the good is defined  the time horizon – elasticity is higher in the long run than the short run

20 ELASTICITY AND ITS APPLICATION 19 The Variety of Demand Curves  The price elasticity of demand is closely related to the slope of the demand curve. 수요의 가격탄력성은 수요곡선의 기울기와 밀접하게 관련됨  Rule of thumb: 어림잡아 ( 눈대중으로 ), 경험상 The flatter the curve, the bigger the elasticity. 수요곡선이 완만할수록 탄력성은 커진다 The steeper the curve, the smaller the elasticity. 수요곡선이 가파를수록 탄력성은 작아진다  Five different classifications of D curves.… D 곡선의 다섯 가지 분류

21 ELASTICITY AND ITS APPLICATION 20 Q1Q1 P1P1 D Perfectly inelastic demand (one extreme case) 완전비탄력적 수요 P Q P2P2 P falls by 10% Q changes by 0% 0% 10% = 0 Price elasticity of demand = % change in Q % change in P = Consumers’ price sensitivity: D curve: Elasticity: Vertical 수직 none 0

22 ELASTICITY AND ITS APPLICATION 21 D Inelastic demand 비탄력적 수요 P Q Q1Q1 P1P1 Q2Q2 P2P2 Q rises less than 10% < 10% 10% < 1 Price elasticity of demand = % change in Q % change in P = P falls by 10% Consumers’ price sensitivity: D curve: Elasticity: relatively steep 비교적 가파름 relatively low 비교적 낮음 < 1

23 ELASTICITY AND ITS APPLICATION 22 D Unit elastic demand 단위탄력적 수요 P Q Q1Q1 P1P1 Q2Q2 P2P2 Q rises by 10% 10% = 1 Price elasticity of demand = % change in Q % change in P = P falls by 10% Consumers’ price sensitivity: Elasticity: intermediate 1 D curve: intermediate slope 중간 기울기

24 ELASTICITY AND ITS APPLICATION 23 D Elastic demand 탄력적 수요 P Q Q1Q1 P1P1 Q2Q2 P2P2 Q rises more than 10% > 10% 10% > 1 Price elasticity of demand = % change in Q % change in P = P falls by 10% Consumers’ price sensitivity: D curve: Elasticity: relatively flat 비교적 완만 relatively high 비교적 높음 > 1

25 ELASTICITY AND ITS APPLICATION 24 D Perfectly elastic demand (the other extreme) 완전탄력적 수요 P Q P1P1 Q1Q1 P changes by 0% Q changes by any % any % 0% = infinity Q2Q2 P 2 = Consumers’ price sensitivity: D curve: Elasticity: Infinity 무한대 Horizontal 수평 Extreme 극단적 Price elasticity of demand = % change in Q % change in P =

26 ELASTICITY AND ITS APPLICATION 25 Elasticity of a Linear Demand Curve 직선 수요곡선의 탄력성 The slope of a linear demand curve is constant, but its elasticity is not. 직선 수요곡선의 기울기는 일정하지만, 탄력성은 일정하지 않다 P Q $30 20 10 $0 0204060 200% 40% = 5.0 E =E = 67% = 1.0 E =E = 40% 200% = 0.2 E =E =

27 ELASTICITY AND ITS APPLICATION 26 Price Elasticity and Total Revenue 가격탄력성과 총수입  Continuing our scenario, if you raise your price from $200 to $250, would your revenue rise or fall? 가격을 $200 에서 $250 로 올리면 수입은 증가할까 아니면 감소할까 ? Revenue = P x Q  A price increase has two effects on revenue: 가격상승은 수입에 두 가지 효과  Higher P means more revenue on each unit you sell. 한 단위당 수입 증가를 의미  But you sell fewer units (lower Q), due to Law of Demand. 수요의 법칙으로 인해 판매량 감소  Which of these two effects is bigger? 두 효과 중 어느 것이 클까 ? It depends on the price elasticity of demand. 그것은 수요의 가격탄력성에 의존

28 ELASTICITY AND ITS APPLICATION 27 Price Elasticity and Total Revenue  If demand is elastic, then price elast. of demand > 1 수요가 탄력적이면 수요의 가격탄력성은 1 보다 크다 % change in Q > % change in P  The fall in revenue from lower Q is greater than the increase in revenue from higher P, so revenue falls. 수량감소에 따른 수입 감소가 가격상승에 따른 수입 증가보다 커서 수입은 감소 Revenue = P x Q Price elasticity of demand = Percentage change in Q Percentage change in P

29 ELASTICITY AND ITS APPLICATION 28 Price Elasticity and Total Revenue Elastic demand (elasticity = 1.8) P Q D $200 12 If P = $200, Q = 12 and revenue = $2400. When D is elastic, a price increase causes revenue to fall. D 가 탄력적이면, 가격인상은 수입을 떨어뜨린다 $250 8 If P = $250, Q = 8 and revenue = $2000. lost revenue due to lower Q 판매량 감소로 인한 수입감소 increased revenue due to higher P 가격인상으로 인한 수입증가 Demand for your websites

30 ELASTICITY AND ITS APPLICATION 29 Price Elasticity and Total Revenue  If demand is inelastic, then price elast. of demand < 1 수요가 비탄력적이면 수요의 가격탄력성은 1 보다 작다 % change in Q < % change in P  The fall in revenue from lower Q is smaller than the increase in revenue from higher P, so revenue rises. 수량감소에 따른 수입 감소가 가격상승에 따른 수입 증가보다 작아서 수입은 증가  In our example, suppose that Q only falls to 10 (instead of 8) when you raise your price to $250. 예에서 가격을 $250 로 올릴 때 수량이 (8 이 아니라 ) 10 으로만 떨어진다고 가정 Revenue = P x Q Price elasticity of demand = Percentage change in Q Percentage change in P

31 ELASTICITY AND ITS APPLICATION 30 Price Elasticity and Total Revenue Now, demand is inelastic: elasticity = 0.82 P Q D $200 12 If P = $200, Q = 12 and revenue = $2400. $250 10 If P = $250, Q = 10 and revenue = $2500. When D is inelastic, a price increase causes revenue to rise. lost revenue due to lower Q increased revenue due to higher P Demand for your websites

32 A. Pharmacies raise the price of insulin by 10%. Does total expenditure on insulin rise or fall? B. As a result of a fare war, the price of a luxury cruise falls 20%. Does luxury cruise companies’ total revenue rise or fall? A C T I V E L E A R N I N G 2 Elasticity and expenditure/revenue 31

33 A C T I V E L E A R N I N G 2 Answers 32 A. Pharmacies raise the price of insulin by 10%. Does total expenditure on insulin rise or fall? Expenditure = P x Q Since demand is inelastic, Q will fall less than 10%, so expenditure rises.

34 A C T I V E L E A R N I N G 2 Answers 33 B. As a result of a fare war, the price of a luxury cruise falls 20%. Does luxury cruise companies’ total revenue rise or fall? Revenue = P x Q The fall in P reduces revenue, but Q increases, which increases revenue. Which effect is bigger? Since demand is elastic, Q will increase more than 20%, so revenue rises.

35 ELASTICITY AND ITS APPLICATION 34 APPLICATION: Does Drug Interdiction Increase or Decrease Drug-Related Crime? 마약금지가 마약관련 범죄를 증가시킬까 감소시킬까 ?  One side effect of illegal drug use is crime: Users often turn to crime to finance their habit. 불법 마약복용의 부작용 중 하나는 범죄 : 돈을 마련하기 위해 범죄를 저지르게 됨  We examine two policies designed to reduce illegal drug use and see what effects they have on drug-related crime. 불법 마약복용을 감소시키기 위해 고안된 두 정책을 검토, 마약관련 범죄에 어떤 효과를 가지는지 살펴봄  For simplicity, we assume the total dollar value of drug- related crime equals total expenditure on drugs. 단순화를 위해 마약관련 범죄의 총비용이 마약에 대한 총지출과 같다고 가정  Demand for illegal drugs is inelastic, due to addiction issues. 중독성으로 인해 불법 마약에 대한 수요는 비탄력적

36 ELASTICITY AND ITS APPLICATION 35 D1D1 Policy 1: Interdiction Price of Drugs Quantity of Drugs S1S1 S2S2 P1P1 Q1Q1 P2P2 Q2Q2 Interdiction reduces the supply of drugs. 금지는 마약공급을 감소시킴 Since demand for drugs is inelastic, P rises proportionally more than Q falls. 수요가 비탄력적이므로 수량 감소보다 가격상승 비율이 큼 Result: an increase in total spending on drugs, and in drug-related crime 마약에 대한 지출 및 관련 범죄 증가 new value of drug- related crime initial value of drug- related crime

37 ELASTICITY AND ITS APPLICATION 36 Policy 2: Education Price of Drugs Quantity of Drugs D1D1 S P1P1 Q1Q1 D2D2 P2P2 Q2Q2 Education reduces the demand for drugs. 교육은 마약수요를 감소시킴 P and Q fall. 가격과 수량 하락 Result: A decrease in total spending on drugs, and in drug-related crime. 결과 : 마약에 대한 총지출 및 마약관련 범죄 감소 initial value of drug- related crime new value of drug- related crime

38 ELASTICITY AND ITS APPLICATION 37 Price Elasticity of Supply  Price elasticity of supply measures how much Q s responds to a change in P. 공급의 가격탄력성은 공급량이 가격 변화에 얼마나 반응하는지를 측정 Price elasticity of supply = Percentage change in Q s Percentage change in P  Loosely speaking, it measures sellers’ price-sensitivity. 쉽게 말해, 판매자의 가격 민감도를 측정  Again, use the midpoint method to compute the percentage changes. 다시 한번, % 변화를 계산하기 위해 중간점 방식을 사용

39 ELASTICITY AND ITS APPLICATION 38 Q2Q2 Price Elasticity of Supply Price elasticity of supply equals P Q S P2P2 Q1Q1 P1P1 P rises by 8% Q rises by 16% 16% 8% = 2.0 Price elasticity of supply = Percentage change in Q s Percentage change in P Example:

40 ELASTICITY AND ITS APPLICATION 39 The Variety of Supply Curves  The slope of the supply curve is closely related to price elasticity of supply. 공급곡선의 기울기는 공급의 가격탄력성과 밀접하게 관련됨  Rule of thumb: 어림잡아 The flatter the curve, the bigger the elasticity. 공급곡선이 완만할수록 탄력성은 커진다 The steeper the curve, the smaller the elasticity. 공급곡선이 가파를수록 탄력성은 작아진다  Five different classifications.… 다섯 가지 분류

41 ELASTICITY AND ITS APPLICATION 40 S Perfectly inelastic (one extreme) 완전비탄력적 P Q Q1Q1 P1P1 P2P2 Q changes by 0% 0% 10% = 0 Price elasticity of supply = % change in Q % change in P = P rises by 10% Sellers’ price sensitivity: S curve: Elasticity: vertical none 0

42 ELASTICITY AND ITS APPLICATION 41 S Inelastic 비탄력적 P Q Q1Q1 P1P1 Q2Q2 P2P2 Q rises less than 10% < 10% 10% < 1 Price elasticity of supply = % change in Q % change in P = P rises by 10% Sellers’ price sensitivity: S curve: Elasticity: relatively steep relatively low < 1

43 ELASTICITY AND ITS APPLICATION 42 S Unit elastic 단위탄력적 P Q Q1Q1 P1P1 Q2Q2 P2P2 Q rises by 10% 10% = 1 Price elasticity of supply = % change in Q % change in P = P rises by 10% Sellers’ price sensitivity: S curve: Elasticity: intermediate slope intermediate = 1

44 ELASTICITY AND ITS APPLICATION 43 S Elastic 탄력적 P Q Q1Q1 P1P1 Q2Q2 P2P2 Q rises more than 10% > 10% 10% > 1 Price elasticity of supply = % change in Q % change in P = P rises by 10% Sellers’ price sensitivity: S curve: Elasticity: relatively flat relatively high > 1

45 ELASTICITY AND ITS APPLICATION 44 S Perfectly elastic (the other extreme) 완전탄력적 P Q P1P1 Q1Q1 P changes by 0% Q changes by any % any % 0% = infinity Price elasticity of supply = % change in Q % change in P = Q2Q2 P 2 = Sellers’ price sensitivity: S curve: Elasticity: horizontal extreme infinity

46 ELASTICITY AND ITS APPLICATION 45 The Determinants of Supply Elasticity  The more easily sellers can change the quantity they produce, the greater the price elasticity of supply. 공급자들이 생산량을 쉽게 변경할 수 있을수록 공급의 가격탄력성은 커짐  Example: Supply of beachfront property is harder to vary and thus less elastic than supply of new cars. 해변토지의 공급은 변화가 어렵고 따라서 신차의 공급보다 탄력성이 낮음  For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market. 많은 재화에 있어, 공급의 가격탄력성이 단기보다 장기에 더 큰데, 그 이유는 기업이 새 공장을 건설하거나 새로운 기업이 시장에 진입할 수 있기 때문임

47 A C T I V E L E A R N I N G 3 Elasticity and changes in equilibrium 46  The supply of beachfront property is inelastic. The supply of new cars is elastic.  Suppose population growth causes demand for both goods to double (at each price, Q d doubles).  For which product will P change the most?  For which product will Q change the most?

48 A C T I V E L E A R N I N G 3 Answers 47 Beachfront property (inelastic supply): P Q D1D1 S Q1Q1 P1P1 A When supply is inelastic, an increase in demand has a bigger impact on price than on quantity. D2D2 B Q2Q2 P2P2

49 A C T I V E L E A R N I N G 3 Answers 48 New cars (elastic supply): P Q D1D1 S Q1Q1 P1P1 A When supply is elastic, an increase in demand has a bigger impact on quantity than on price. D2D2 Q2Q2 P2P2 B

50 ELASTICITY AND ITS APPLICATION 49 S How the Price Elasticity of Supply Can Vary P Q Supply often becomes less elastic as Q rises, due to capacity limits. 생산능력의 한계로 인해 생산이 늘 때 공급의 탄력성이 떨어지기도 함 Supply often becomes less elastic as Q rises, due to capacity limits. 생산능력의 한계로 인해 생산이 늘 때 공급의 탄력성이 떨어지기도 함 $15 525 12 500 $3 100 4 200 elasticity > 1 elasticity < 1

51 ELASTICITY AND ITS APPLICATION 50 Other Elasticities  Income elasticity of demand: measures the response of Q d to a change in consumer income 수요의 소득탄력성은 소비자의 소득변화에 대한 수요량의 반응을 측정 Income elasticity of demand = Percent change in Q d Percent change in income  Recall from Chapter 4: An increase in income causes an increase in demand for a normal good. 제 4 장에서 소득의 증가가 정상재의 수요 증가를 초래함을 기억해 보라  Hence, for normal goods, income elasticity > 0. 정상재는 소득탄력성이 0 보다 크고  For inferior goods, income elasticity < 0. 열등재는 0 보다 작다

52 ELASTICITY AND ITS APPLICATION 51 Other Elasticities  Cross-price elasticity of demand: measures the response of demand for one good to changes in the price of another good 수요의 교차 - 가격탄력성은 한 재화 가격의 변화에 대한 다른 재화 수요의 반응을 측정 Cross-price elast. of demand = % change in Q d for good 1 % change in price of good 2  For substitutes, cross-price elasticity > 0 (e.g., an increase in price of beef causes an increase in demand for chicken) 대체재는 교차 - 가격탄력성이 0 보다 크고  For complements, cross-price elasticity < 0 (e.g., an increase in price of computers causes decrease in demand for software) 보완재는 교차탄력성이 0 보다 작다

53 ELASTICITY AND ITS APPLICATION 52 Cross-Price Elasticities in the News “As Gas Costs Soar, Buyers Flock to Small Cars” -New York Times, 5/2/2008 “Gas Prices Drive Students to Online Courses” -Chronicle of Higher Education, 7/8/2008 “Gas prices knock bicycle sales, repairs into higher gear” -Associated Press, 5/11/2008 “Camel demand soars in India” (as a substitute for “gas-guzzling tractors”) -Financial Times, 5/2/2008 “High gas prices drive farmer to switch to mules” -Associated Press, 5/21/2008

54 CHAPTER SUMMARY  Elasticity measures the responsiveness of Q d or Q s to one of its determinants.  Price elasticity of demand equals percentage change in Q d divided by percentage change in P. When it’s less than one, demand is “inelastic.” When greater than one, demand is “elastic.”  When demand is inelastic, total revenue rises when price rises. When demand is elastic, total revenue falls when price rises. 53

55 CHAPTER SUMMARY  Demand is less elastic in the short run, for necessities, for broadly defined goods, or for goods with few close substitutes.  Price elasticity of supply equals percentage change in Q s divided by percentage change in P. When it’s less than one, supply is “inelastic.” When greater than one, supply is “elastic.”  Price elasticity of supply is greater in the long run than in the short run. 54

56 CHAPTER SUMMARY  The income elasticity of demand measures how much quantity demanded responds to changes in buyers’ incomes.  The cross-price elasticity of demand measures how much demand for one good responds to changes in the price of another good. 55