Scribd
Upload
13 views19 pages

Chap 3

Uploaded by

Annie Duolingo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
13 views19 pages

Chap 3

Uploaded by

Annie Duolingo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 19

CHAPTER 3: ELASTICITY

1. Elasticity of Demand

1.1. Price elasticity of demand

• Price elasticity of demand (Edp) measures how much Qd responds to a change in P


• Loosely speaking, it measures the price-sensitivity of buyers’ demand.
“ The % change in quantity demanded resulting from 1% change in price is … “
* Qd and P have inverse relationship

a) Calculating Edp : Ed= -a or |Ed|= a

Ed = %ΔQd / %ΔP

• Standard method : At a particular P and Qd


• Midpoint method: In the range of P and Qd

Ed = %ΔQd / %ΔP

% change = (end value – start value/midpoint) x 100%


_________________________________________

The midpoint method gives us the same percent change in value regardless of if
we calculate the elasticity from point A to point B or from point B to point A.
=> Use it when we don't know the starting and ending points

b) The Determinants of Price Elasticity: substitutes, necessary/luxury,


broadly/narrowly, time horizon ( long or short run )

• 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
c) Types of Price elasticity of demand:

➢ Ed = 0: Perfectly inelastic demand

➢ Ed < 1: Inelastic demand ( usually happen with necessities goods )

➢ Ed = 1: Unit elastic demand

➢ Ed > 1: Elastic demand ( good that have many substitutes )

➢ Ed = infinity: Perfectly elastic demand ( “ perfect competition” - same quality,


same price - one good raise price => lose market power : and vice versa )

Ques: ng bán có động lực để giảm giá sản phẩm mình không ?
Buyers:
- giá giảm thì mình mua : cheap cheap cheap
- giá giảm mình ko mua : nghi ngờ về chất lượng
Sellers: ko có động lực => cùng chất lượng mắc gì giảm giá để lợi nhuận thấp hơn

e.g. medicine
d) The Variety of Demand Curves
• The price elasticity of demand is closely related to the slope of the demand curve.
• Rule of thumb:
➢ The flatter the curve, the greater the elasticity.
➢ The steeper the curve, the smaller the elasticity.
5 classifications of D curve:

• |Ed| = 0 : Perfectly Inelastic


• |Ed| <1 : Inelastic
• |Ed| = 1 : Unit elastic
• |Ed| > 1 : Elastic
• |Ed| = ∞ : Perfectly elastic
e) Edp and Total Revenue

Total revenue - TR: the amount paid by buyers and received by sellers of a good
= Price x Quantity
TR = P x Q

|Ed| < 1: Relatively Inelastic


P rises => TR rises
Inelastic => Change in Demand less than change in Price => P rise “a” % , D fall < “a”%
=> Total Revenue increase
|Ed| > 1: Relatively Elastic
P rises => TR falls
Elastic => Change in Demand more than change in Price => P rise “a”%, D fall >”a”
1.2. Cross elasticity of demand
Cross-price elasticity of demand:
measures the response of demand for one good to changes in the price of another good

Ex: Edx,y = 1,5


=> Py changes by 1%, Qdx changes by 1,5%

For substitutes, cross-price elasticity > 0


(e.g., an increase in price of beef causes an increase in demand for chicken)

For complements, cross-price elasticity < 0


(e.g., an increase in price of computers causes decrease in demand for software)

1.3. Income elasticity of demand


Income elasticity of demand:
measures the response of Qd to a change in consumer income.

For normal goods, income elasticity > 0


( Income increase -> D increase )

For inferior goods, income elasticity < 0


( Income increase -> D decrease )
2. Elasticity of supply
• Price elasticity of supply (Es) measures how much Qs responds to a change in P
• Loosely speaking, it measures the price-sensitivity of sellers
“ The % change in quantity supplied resulting from 1% change in price is … “
* Qd and S have covariate relationship

a) Calculating Esp : Es = a ( Es > 0 )

Es = %ΔQs / %ΔP

• Standard method : At a particular P and Qd

Es = %ΔQs / %ΔP

• Midpoint method: In the range of P and Qd

Es = %ΔQs / %ΔP

% change = (end value – start value/midpoint) x 100%

b) The Variety of Supply Curves


Five classifications of S curve:
• Es = 0: Perfectly Inelastic (Antique old painting - pricey but the amount is only one )
• Es <1: Inelastic ( Housing - scarcity of land)
• Es = 1: Unit elastic ( Rare )
• Es > 1: Elastic
• Es = ∞ : Perfectly elastic ( Rare - bán 1 giá giá đổi ko bán )
• The price elasticity of supply is closely related to the slope of the supply curve.
• Rule of thumb:
➢ The flatter the curve, the greater the elasticity.
➢ The steeper the curve, the smaller the elasticity.

c) The Determinants of Supply Elasticity ( the ability to change the quantity, time horizon )
• How easy the sellers can change the quantity they produce
• The time horizon—elasticity is higher in the long run than the short run
3. Applications
Elasticity and tax incidence
If the government imposes a tax on the supplier, which group will bear most of the
burden?
Exercise
1)
Why did OPEC ( Organization of petroleum exporting countries) fail to keep the price of oil high ?
-> Because reaction will be stronger in the long run

The statement, "OPEC failed to maintain a high price of oil in the long run, partly
because both the supply of oil and the demand for oil are more elastic in the long run
than in the short run," is True.

The short-run is the time frame when at least one input is fixed. Petroleum and products
made from petroleum are many and varied. While petroleum is required, it may be
possible for OPEC to keep prices high. Over the long run, however, when all outputs can
be changed, producers will look to find cheaper substitutes for petroleum products. An
example that is easy to understand would be gasoline and automobiles. High petroleum
and gas prices have encouraged the development of several alternative energy sources
to fuel vehicles, including diesel fuel and electricity.

At the same time, oil fields were developed in South America, which added to the supply.
2) Does drug interdiction increase/ decrease drug-related crime ?

Soulution:
- Arrest suppliers ( short-run measure ) : As illustrated in < SUPPLY> graphic,
decreasing suppliers will increase Total Rev. But the govt keep doing because it
is what suitable in the short term
- Education ( long-term measure )

https://www.52coding.com.cn/2019/02/22/Elasticity%20and%20Its%20Application/#can-
good-news-for-farming-be-bad-news-for-farmers

You might also like