The relationship between the price of a good and how much of it sb wants to buy

Think about a demand curve by looking at demand schedule

Elasticity measures how much one variable responds to changes in another variable
- One type of elasticity measures how much demand for your websites will fall if you raise
your price
The elasticity of demand is going to be a measure of how responsive quantitive demanded is
to a change of price
Elasticity is a measure of how much buyers and sellers respond to changes in market conditions
- Allow us to ananlyze supply and demand with greater precision
the price elasticity of demand is computed as the percentage change in the quantity
demanded divided by the percentage change in price
because the price elasticity of demand measures how much quantity demanded responds to
the price, it is closely related to the slope of the demand curve. But instead of looking at unit
change, elasticity looks at percentage change. What do we mean by percentage change?
Ex: if there are 50 potatoes in a store and you picked 16 of them, what percentage of the total
did you pick?
Paul used to weigh 200lbs last year, but now he only weighs 175lbs. how many lbs did he
lose? What is the percent change of the loss?
Computing the price of elasticity of demand:
Ex: if the price of an ice cream cone increases from 2$ to 2.24 and the amount you buy falls
from 10 to 8 cones then your elasticity of demand would be caculated as:
The midpoint formula is prederable when calculating the price elasticity of demand bc it
gives the same answer regardless of the direction of the change
EX: if the price of an ice cream cone increases from 2$ to 2.24 and the amount you buy falls
from 10 to 8 cones then your elasticity of demand, using the midpoint formula, would be
caculated as:
Determinants of price elasticity of demand include: Available of close substitudes,
Necessitites versus luxuries, definition of the market, time horizon
Demand tend to be more inelastic: if the food is a necessity, ex: rice, water, etc. if the time
period is shorter, the smaller the number of close substitudes, the more broadly defined the
market
Demand tends to be more elastic: if the good is a luxury, ex: houses, cars, phones,etc; the
longer the time period, the larger the number of close substitudes, the more narrowly defined
the market
 Revenue: computed as the price of the good times the quantity sold: TR=P*Q
When the same increase in price reduces the quantity demanded just a little or when the same
decrease in price increases the quantity demanded just a little, then the demand curve is said to
be inelastic or less elastic or even not elastic
First of all, what is elasticity? Well, due to the definition, it measures of the responsiveness of
quantity demanded or quantity supplied to a change in one of its determinants. Or it is a measure
of how much buyers and sellers respond to changes in market conditions, and it allows us to
analyze supple and demand with greater precision. Let me give you an example of this
So the first concept that we are going to review is about elasticity of demand which measures
how much consumers respond to changes in these variables, economists use the concept of
elasticity or you can understand as how much demands responds to changes in its determinants.

On elastic demand curve, the quantity demanded is much more responsive to the price than it is
on the inelastic demand curve.
A demand curve is said to be elastic when an increase in price reduces the quantity demanded by
a lot. And similarly, when a decrease in price increases the quantity demanded by a lot- that’s an
elastic curve. The quanityt is changing a lot in response to the price. If two linear demand or
supply curves run through a common point, then at any given quantity the curve that is flatter,
more horizontal, that’s the more elastic curve
Slide 1:
Good afternoon everyone!
Q: Have you felt tired yet? or are you ready for our next chapter.
Today, our group will give you a presentation about chapter 5 – elasticity and its applications. In
this chapter we will discuss about The Elasticity of Demand, The Elasticity of Supply and also
the fascinated applications of supply, demand and elasticity.
Slide 2:
Let me introduce my group first, we are group 3, my name is…, (lần lượt gthieu nha)
—
Slice 3:
In this chapter, we are going divide the lesson into 3 part, this is our table of contents.
The first one is The Elasticity of Demand.
The next is Elasticity of Supply.
And the last one is Three Application of Supply, Demand and Elasticity.
Slide 4: 
Well, the law of demand tells us that when the price goes up, the quantity demanded goes
down, and vice-versa, when the price goes down the quantity demanded goes up. But how
much does quantity demanded change when the price changes? When the price changes, is
the demanded of sth change a lot or just a little? that’s the concept that elasticity is going to help
us to understand.
Slide 5:
Before knowing what is it definition, this is an example: What if an event drives up the price of
some goods in Vietnam, how would Vietnamese consumer respond to the higher price?
To be clearer, there is an event that happened in the past, switching to other sources of protein
like chicken and eggs

Q:So let’s defined elasticity. Do anyone here know what is the meaning of elasticity?
Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to a
change in one of its determinants.

The elasticity of demand is going to be a measure how much consumers respond to changes in
these variables, economists use the concept of elasticity. Or in other words, it’s a measure of
how responsive the quantity demanded is to a change in the price. Price elasticity of demand is
Percentage change in quantity demanded divided by the percentage change in price. And We
have 2 types of demand, one is elastic demand and the other is inelastic demand.

Elastic demand is the Quantity demanded responds substantially to changes in price. And
Inelastic demand is the Quantity demanded responds only slightly to changes in price. Here’s
an example. Notice that when the price of a brand shirt increases from 10$ to 30$ that the
quantity demanded goes down by just a little, by five units from 80 units to 75 units. This turns
out to be an elastic demand. On the other hand, notice that the same 20$ increase in price of
the other brand now reduces the quantity demanded from 80 units to 20 units. This will turn out
to be a inelastic demand.

What determines whether a demand curve is more or less elastic? Well, the key determinant is
the availability of substitudes. As we’ll see in a minute, the more substitudes, the more elastic
the curve. The availability of substitutes is really the key determinant of how elastic a demand
curve is. If there’s lots of substitutes for good then when the price of that good goes up, people
are going to switch from it, the good whose price is increased, they’re going to buy substitutes
instead. That means when price of a good with lots of substitutes goes up, the quantity
demanded is going to go down a lot. On the other hand, if we have a good which has very few
substitutes, then consumers are going to find it harder to adjust when the price change. In
particular, if the price goes up and there are very few substitutes, consumers aren’t going to be
able to switch out of that good into another good.  I’ll give you an example that is closely related
to the number of substitudes: Gasoline which has just a few substitutes. You can’t use water like
gasoline, cause you know that if you pour water into your, like, car or motorbike, your engine will
be destroyed right? You will like, spend a large amount of money to repaired it. So, that’s mean,
if the price of gasoline goes up, it causes no change. People still need the gasoline for their
vehicles as well. You can see that there is few subtitutes for Gasoline, that means inelastic
demand for gasoline. Here’s another example, let’s take an example of Coca Cola. Coca Cola is
just one of soft drinks and there are many other brands, types in the market. So if one days, the
price a bottle of Coca Cola increases about 10$ per one, people can find the other brands with
the same taste, cheaper instead. And that’s mean, there’s an elastic demand for Coca Cola
Another factor determining the elasticity of demand, necessities versus luxuries. For
necessities, consumers do not change quantity demanded much when the price changes, this is
inlastic demand. But, on the other hand, with luxuries good, people will alter their behavior when
the price ries, and this is elastic demand. Let’s take rice and cars as example. Most Vietnamese
people need rice for their meal, so one day, if the price of rice rising for about 2$, consumers
don’t care about that much, they need rice so the quantity demanded is still nearly the same as
the previous price. However, if price of car increase, people will consider carefully whether to
buy or not cause they don’t really need a car or a new one, they could use motorbike or their
recent car. Through the example, we could see the different between necessities goods with
luxuries goods, necessies seem to be more in elastic than luxuries goods.
We have another one is the market. If we have a narrowly defiened market, this mean, there is
a small, specific category with many substitutes alike, which is a elastic demand. While broadly
defined market, a wide-range of products, many categories, difficult to recognize the substitutes,
and this is a inelastic demand.

Next is the time horizon, it influenes the elasticity of demand for a good. Immidiately following a
price increase, it’s going to be difficult to find substitutes. Therefore, immidiately following a
price increase, demand is likely to be inelastic, but over time, consumers can adjust their
behavior and they can find more substitutes. Conclude that Demand is more elastic over longer
time horizons

As I said before, price elasticity of demand is Percentage change in quantity demanded divided
by the percentage change in price. And we use Use absolute value for this formula, we drop,
ignore the minus sign. So let’s write it like this (CT trong slide) Let’s give an example for this. Ex:
If the price of milk tea increases by 20% and over a month, the quantity demanded falls by 3%,
then the price elasticity of demand is: 3%/20%=… Actually, there’s a minus in front of 3, and we
get a negative result, but there, just ignore that, it’s okay to drop the minus. We have a method
to calculate the percentage change in sth, it’s the midpoint method. This method is the Q2
minus Q1 before divided by the average which caculated by the Q2 plus Q1 before divided by 2,
the result after all will multiply with 100. The same way with the percentage of price, P2 minus
P1, then divided by the P2 plus P1 before divided by 2, then multiply the result with 100. An
example for this, assume that the price of a bottle of perfume increase from 100$ to 1000$, and
the quantity demanded falls from 5000 to 3500 bottles in a year. From this, we calculate the
price elasticity of demand depend on midpoint method: %Q= ((3500-5000)/((3500+500))/2)x100;
%P= (1000-100)/(1000+100)/2 x 100=; PED= %Q/%P

Well, we could see that if elasticity of demand is greater than one, the demand curve is elastic.
If the elasticity of demand less than one, we would say the demand curve is inelastic. And if
elasticity of demand is equal to one, then the demand curve is unit elastic. Demand tend to be
more inelastic: if the food is a necessity, ex: rice, water, etc. if the time period is shorter, the
smaller the number of close substitudes, the more broadly defined the market. Demand tends to
be more elastic: if the good is a luxury, ex: houses, cars, phones,etc; the longer the time period,
the larger the number of close substitudes, the more narrowly defined the market.  And there
are variety of demand curve. Demand is perfectly inelastic when the price elasticity of demand =
0, Demand curve is vertical. Demand is perfectly elastic when the price elasticity of demand
equal infinity, the demand curve is horizontal.  The flatter the demand curve, The greater the
price elasticity of demand. The steeper the demand curve through a point,  the smaller the price
elasticity of demand.

We need to cover one more important point about the elasticity of demand, and that is its
relationship to total revenue. TR is the Amount paid by buyers and received by sellers of a
good. It is computed as the price of the good times the quantity sold: TR=P*Q. If demand is
inelastic, TR increases. If demand is elastic, TR decreases. When demand is inelastic means
that elasticity less than 1, P and TR move in the same direction. If P ↑, TR also ↑. When
demand is elastic, elasticity  is greater than 1, P and TR move in opposite directions.  If P ↑, TR
↓. And If demand is unit elastic elasticity equal to 1, the Total revenue remains constant when
the price changes. Example: slide

Another one is a linear demand curve which has a constant slope. Recall slope is defined as
“rise over run”, which here is the ratio of the change in price “rise” to the change in quantity
“run”. And The slope of a linear demand curve is constant, but the elasticity is no. At points with
a low price and a high quantity, demand is inelastic. At points with a high price and a low
quantity, demand is elastic.

The next factor of elasticity is income elasticity of demand. It measures how much quantity
demanded of a good responds to a change in consumers’ income. It is computed as the
percentage change in the quantity demanded divided by the percentage change in income.
Normal goods have Positive income, and necessities have smaller income elasticity elasticity,
luxuries have larher income elasticity by contrast. On the other hand, inferior goods have
Negative income elasticities. And next, we have cross price elasticity of demand. It shows How
much the quantity demanded of one good responds to a change in the price of another good. It
is calculated Percentage change in quantity demanded of the first good divided by the
percentage change in price of the second good.

We have talked about substitutes a lot before, so what is substitutes? Substitutes are Goods
typically used in place of one another with Positive cross-price elasticity while complements are
Goods that are typically used together with Negative cross-price elasticity. This is the end of the
elasticity of demand part, let’s come to the next part: the elasticity of supply

The elasticity of supply measures how responsive the quantity supplied is to a change in price..
So it’s almost the same to the elasticity of demand except instead of measuring the
responsiveness of quantity demanded, it measures the responsiveness of the quantity supplied
to a change in price. And price elasticity of supply is percentage change in quantity supplied
divided by the percentage change in price, it measures how much the quantity supplied of a
good responds to a change in the price of that good. This factor depends on the flexibility of
sellers to change the amount of the good they produce. We also have two type of supple: elastic
supple and inelastic supply. Elastic supply is the quantity responds substantially to changes in
the price while inelastic supply is the quantity supplied responds only slightly to changes in the
price.  Ex: What determines the price of elasticity of supply? It’s the time period. Ex: Supply is
more elastic in the long run. And how can we calculate the price elasticity of supply? Well, I
have said before that it is the percentage change in quantity supplied divided by percentage
change in price, and its result always positive. Pic+Ex. We also have the midpoint method to
find the percentage change in quantity supplied and the percentage change in price. Ex.  There
is variety of supply curves. The supply is unit elastic if the price elasticity of supply equal 1,
supply is elastic when the price of elasticity of supply is greater than 1 and supply is inelastic iff
the price elasticity of supply less than 1. Supply is perfectly inelastic when the price elasticity of
demand = 0, the supply curve is vertical. Supply is perfectly elastic when the price elasticity of
supply equal infinity, the demand curve is horizontal. In some markets, the elasticity of supply is
not constant but varies over the supply curve. From the points with low price and low quantity, it
is elastic supply and the capacity for production not being used. By contrast, from the points
with high price and high quantity, it is inelastic supply.

We will continue with the last part: