Elasticity
IN THIS CHAPTER YOU WILL . . .
Learn the meaning of the elasticity of demand
Examine what determines the elasticity of demand
Learn the meaning of the elasticity of supply
ELASTICITY ITS
AND
A P P L I C AT I O N
Imagine yourself as a Kansas wheat farmer. Because you earn all your income from selling wheat, you devote much effort to making your land as productive as it can be. You monitor weather and soil conditions, check your fields for pests and disease, and study the latest advances in farm technology. You know that the more wheat you grow, the more you will have to sell after the harvest, and the higher will be your income and your standard of living. One day Kansas State University announces a major discovery. Researchers in its agronomy department have devised a new hybrid of wheat that raises the amount farmers can produce from each acre of land by 20 percent. How should you react to this news? Should you use the new hybrid? Does this discovery make you better off or worse off than you were before? In this chapter we will see that these questions can have surprising answers. The surprise will come from
93
Examine what determines the elasticity of supply
Apply the concept of elasticity in three very dif ferent markets
94
PA R T T W O
S U P P LY A N D D E M A N D I : H O W M A R K E T S W O R K
applying the most basic tools of economics—supply and demand—to the market for wheat. The previous chapter introduced supply and demand. In any competitive market, such as the market for wheat, the upward-sloping supply curve represents the behavior of sellers, and the downward-sloping demand curve represents the behavior of buyers. The price of the good adjusts to bring the quantity supplied and quantity demanded of the good into balance. To apply this basic analysis to understand the impact of the agronomists’ discovery, we must first develop one more tool: the concept of elasticity. Elasticity, a measure of how much buyers and
Learn the meaning of the elasticity of demand
Examine what determines the elasticity of demand
Learn the meaning of the elasticity of supply
ELASTICITY ITS
AND
A P P L I C AT I O N
Imagine yourself as a Kansas wheat farmer. Because you earn all your income from selling wheat, you devote much effort to making your land as productive as it can be. You monitor weather and soil conditions, check your fields for pests and disease, and study the latest advances in farm technology. You know that the more wheat you grow, the more you will have to sell after the harvest, and the higher will be your income and your standard of living. One day Kansas State University announces a major discovery. Researchers in its agronomy department have devised a new hybrid of wheat that raises the amount farmers can produce from each acre of land by 20 percent. How should you react to this news? Should you use the new hybrid? Does this discovery make you better off or worse off than you were before? In this chapter we will see that these questions can have surprising answers. The surprise will come from
93
Examine what determines the elasticity of supply
Apply the concept of elasticity in three very dif ferent markets
94
PA R T T W O
S U P P LY A N D D E M A N D I : H O W M A R K E T S W O R K
applying the most basic tools of economics—supply and demand—to the market for wheat. The previous chapter introduced supply and demand. In any competitive market, such as the market for wheat, the upward-sloping supply curve represents the behavior of sellers, and the downward-sloping demand curve represents the behavior of buyers. The price of the good adjusts to bring the quantity supplied and quantity demanded of the good into balance. To apply this basic analysis to understand the impact of the agronomists’ discovery, we must first develop one more tool: the concept of elasticity. Elasticity, a measure of how much buyers and