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Elasticity

This document discusses concepts related to elasticity including demand, supply, equilibrium price, and different types of elasticity like price elasticity of demand, income elasticity of demand, and cross price elasticity of demand. It provides explanations and examples of how to compute these different elasticities.

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Mahedi
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20 views20 pages

Elasticity

This document discusses concepts related to elasticity including demand, supply, equilibrium price, and different types of elasticity like price elasticity of demand, income elasticity of demand, and cross price elasticity of demand. It provides explanations and examples of how to compute these different elasticities.

Uploaded by

Mahedi
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
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Elasticity and Its

Application
Compiled by:
Md. Mahedi Hasan FCA CPFA
Few Important Concept

• The macroeconomic environment in which all businesses have to operate,


which incorporates:
✓Global influences
✓National influences

• The microeconomic environment of the particular business, which basically


involves looking at how the market (or price) mechanism works

• Market: a situation in which a potential buyers and sellers of an item or ‘goods’


come together for purposes of exchange

• Demand: the quantity of good that potential purchasers would buy, or attempt
to buy, if the price of the good were at a certain level.
What factors determine demand?
Supply: The quantity of a good that existing suppliers would want to
produce for the market at a given price.

What factors influence supply?

• Price
• Price of other goods
• Price of related goods
• Cost of making the goods
• Changes in technology
• Other factors

The effect of time on supply and demand

• In the case of supply, changes in the quantity of a good supplied often require the laying
off or hiring of new workers, or the installation of new machinery. These changes,
brought about by management decisions, take some time to implement.
• In the case of demand, it takes time for consumers to adjust their buying patterns,
although demand often responds more rapidly than supply to changes in price or other
demand conditions
Equilibrium price: The price
of a good at which the
volume demanded by
consumers and the volume
businesses are willing to
supply are the same.
Elasticity . . .

… is a measure of how much buyers and sellers respond to changes


in market conditions
… allows us to analyze supply and demand with greater precision.
Journal Question-Name 3 necessities and 3 luxuries that you would
buy.
Price Price elasticity of demand is the percentage change
in quantity demanded given a percent change in the
Elasticity of price.

Demand It is a measure of how much the quantity


demanded of a good responds to a change in the
price of that good.
Computing the Price Elasticity of
Demand
The price elasticity of demand is computed as the percentage change
in the quantity demanded divided by the percentage change in price.

Price Elasticity = Percentage Change in Qd


Of Demand Percentage Change in Price
Computing the Price Elasticity of
Demand
Percentage change in quatity demanded
Price elasticity of demand =
Percentage change in price
Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your elasticity of demand would be
calculated as:
(10 − 8 )
 100
10 20 percent
= =2
( 2.20 − 2.00 )
 100 10 percent
2.00
Ranges of Elasticity
Inelastic Demand
Percentage change in price is greater than
percentage change in quantity demand.
Price elasticity of demand is less than one.
Elastic Demand
Percentage change in quantity demand is greater
than percentage change in price.
Price elasticity of demand is greater than one.
Determinants of Price Elasticity of Demand

• Demand tends to be more inelastic


• If the good is a necessity.
• If the time period is shorter.
• The smaller the number of close substitutes.
• The more broadly defined the market.
Determinants of
Price Elasticity of Demand

Demand tends to be more elastic :

if the good is a luxury.


the longer the time period.
the larger the number of close substitutes.
the more narrowly defined the market.
Elasticity and
Total Revenue
Income Elasticity of Demand
Income elasticity of demand measures how much the 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.
Computing Income Elasticity

Percentage Change
Income Elasticity = in Quantity Demanded
of Demand Percentage Change
in Income
Income Elasticity
- Types of Goods -
Normal Goods
Income Elasticity is positive.
Inferior Goods
Income Elasticity is negative.
Higher income raises the quantity demanded for
normal goods but lowers the quantity demanded
for inferior goods.
Cross Price Elasticity of Demand

• Elasticity measure that looks at the impact a change in the price of


one good has on the demand of another good.
• % change in demand Q1/% change in price Q2.
• Positive-Substitutes
• Negative-Complements.
Price Elasticity of Supply

Price Elasticity = Percentage Change in Qs


Of Supply Percentage Change in Price

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