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Chapter 3 Elasticity

1. This document discusses the concept of elasticity, specifically price elasticity of demand and supply. It defines elasticity as measuring the responsiveness of quantity demanded or supplied to changes in determinants like price or income. 2. There are different types of elasticity - price elasticity measures responsiveness to price changes, income elasticity to income changes, and cross elasticity to the price of a related good. Degrees of elasticity include elastic, inelastic, unitary and perfectly elastic/inelastic. 3. Formulas are provided to calculate each type of elasticity. Determinants that impact elasticity like availability of substitutes and importance in budget are also explained.

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78 views

Chapter 3 Elasticity

1. This document discusses the concept of elasticity, specifically price elasticity of demand and supply. It defines elasticity as measuring the responsiveness of quantity demanded or supplied to changes in determinants like price or income. 2. There are different types of elasticity - price elasticity measures responsiveness to price changes, income elasticity to income changes, and cross elasticity to the price of a related good. Degrees of elasticity include elastic, inelastic, unitary and perfectly elastic/inelastic. 3. Formulas are provided to calculate each type of elasticity. Determinants that impact elasticity like availability of substitutes and importance in budget are also explained.

Uploaded by

farah hanim
Copyright
© Attribution Non-Commercial (BY-NC)
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Download as PPTX, PDF, TXT or read online on Scribd
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ELASTICITY

PREPARED BY: ROSMAH BT ABD GHANI @ ISMAIL

ELASTICITY

CHAPTER OBJECTIVES
To explain the concept of elasticities.
To calculate elasticities of demand ( price, income and cross).

ELASTICITY

Topics to be covered
Definition types of elasticity How to calculate Determinants

ELASTICITY

DEFINITION OF ELASTICITY:
Measures the responsiveness of quantity demanded or quantity supplied due to a changes in its determinants.
ELASTICITY

DEMAND

SUPPLY

PRICE

CROSS

INCOME

PRICE

ELASTICITY

ELASTICITY OF DEMAND Measures the responsiveness/sensitivity of quantity demanded due to the changes in its determinants.
There are 3 types elasticity of demand: 1. Price elasticity of demand 2. Income elasticity of demand 3. Cross elasticity of demand

PRICE ELASTICITY OF DEMAND(p)

ELASTICITY

Measure the responsiveness of the quantity demanded due to the change in its price .
Formula:

= % in quantity demanded % in price

Where : Q2= New Quantity Demanded Q1= Original Quantity Demanded P1 = Original Price Level P2 = New Price Level

Example: suppose the water park raises its tickets from RM25 to RM30 and the no. Of tickets sold falls from 2000 to 1000.Calculate price elasticity of demand.

1.
2. P1= RM 25 P2= RM 30 3. Q1=2000 Q2= 1000

Indicates the ve (inverse) relationship between P & Qd as stated in the law of demand so we must ignore ve sign

5 DEGREE OF PRICE ELASTICITY OF DEMAND


Elasticity p > 1 p < 1 p =1 p = 0 Degree Of Elasticity Elastic Inelastic Unitary elastic Perfectly inelastic % Changes %P < %Q %P > %Q %P = %Q %Q= 0

ELASTICITY

p =

Perfectly elastic

%P=0

Determinants price elasticity of DD


1. Availability of substitutes 2. Relative importance of item in the budget 3. Time frame 4. The degree of necessity or luxury 5. Consumption habit

1. AVAILABILITY OF SUBTITUTES
more substitutes-elastic demand less substitutes-inelastic demand

2. RELATIVE IMPORTANCE OF THE ITEM IN THE BUDGET/PROPORTION OF THE EXPENDITURE


Small proportion inelastic demand (consumers less sensitive) large proportion-elastic demand (consumer sensitive)

3. Time frame Short term- inelastic demand Long term- elastic demand 4. The degree of necessity or luxury Necessity goods- inelastic Luxury goods- elastic 5. Habit Inelastic demand

ELASTICITY

CROSS ELASTICITY OF DEMAND


DEFINITION:
MEASURES OF THE RESPONSIVENESS/SENSITIVITY OF QUANTITY DEMANDED FOR ONE PRODUCT (QDx) DUE TO A CHANGE IN PRICE OF A RELATED PRODUCT (Py)

Formula:

= % in quantity demanded of good X % in price of good Y

ELASTICITY

CROSS ELASTICITY OF DEMAND


Relationship between goods
Elasticity x = (+ve) x = (-ve) x = 0 Interpretation substitute goods complementary goods Not related goods

INCOME ELASTICITY OF DEMAND (Y )


DEFINITION: MEASURES THE SENSITIVITY/ RESPONSIVENESS OF THE QUANTITY DEMANDED DUE TO A CHANGE IN INCOME.

ELASTICITY

Formula:

= % in quantity demanded % in income

ELASTICITY

INCOME ELASTICITY OF DEMAND (Y )


Types of goods
Elasticity y > 1 0< y < 1 y =0 interpretation Luxury goods Normal goods Necessities goods Examples Diamonds, luxury cars Shirt, shoes , pen Rice, vegetables

y < 0

Inferior/ giffen goods

Used car, low grade fruits

p & Relation To Total Revenue


To know the relation of consumer towards a P
TR as the amount of income received from the sales of goods & services. TR , or constant depends on degree of elasticity of demand.

TR=PxQ which TR= total revenue P = price level Q = quantity of goods

Elastic
P P

6 4

6 4

80
10 20 Q

60
10

20

P Po :4 P1: 6

x Q

= TR =80 =60 = TR

Qo: 20 Q1: 10

P < Qd

P10%,Qd20%,TR10% vice versa. GOOD: have many substitute goods

inelastic
P P 10

10

30
D

8
3 4

D Q 3 4

P Po :2

x Q Qo: 4 Q1: 3

= TR =8 = 30 = TR

P1: 10

P10%, Qd5%, TR5% goods: less substitutes,petrol Less substitute goods

P > Qd

Unitary elastic
P P

4
3

4
3

12
D 3 4 Q

12
3 4

D Q

P Po :3 P1: 4

Q Qo: 4 Q1: 3 Qd

TR = 12 = 12 = TR constant

any in P does not affect TR. P10%, Qd10%, TR constant

P =

Price elasticity of supply


Measure the responsiveness of the quantity supplied due to the change in its price .
Formula:

= % in quantity supplied % in price

Where : Q2= New Quantity Supplied Q1= Original Quantity Supplied P1 = Original Price Level P2 = New Price Level

5 DEGREE OF PRICE ELASTICITY OF SUPPLY


ELASTICITY s > 1 s < 1 s =1 s = 0 DEGREE OF ELASTICITY Elastic Inelastic Unitary elastic Perfectly inelastic % CHANGES %P < %Q %P > %Q %P = %Q %Q= 0

s =

Perfectly elastic

%P=0

1. Calculate price elasticity of supply Good A B % Qs decrease 200 15 % P decrease 160 140 s

C
D

0
100

160
100

2. When the price is RM40, the Qs is 100 units and when the price increases to RM60, the Qs is 200 units. Calculate the price elasticity of supply when the price increase.

Determinants of price elasticity of supply


Cost of production Substitutability of inputs used Period of production process Time frame for supply Degree of perishability

1. Cost of production
In production cost is small- elastic SS In production cost is big- inelastic SS

2. Substitutability of inputs used


Inputs can be easily substituted-elastic SS Inputs cannot be substituted-inelastic SS

3. Period of production
Short production process elastic SS Long production process inelastic SS

4. Time frame
Short run- inelastic SS Long run- elastic SS

5. Perishability
Highly perishable( agri. goods)- inelastic SS Non-perishable (manufactures goods)-elastic SS

THANK YOU

1. ELASTIC (p>1)
P

P2
P1 D

Q2

Q1

Qd

%P < %Qd i.g : if the price good A by 5%, the Qd for goods A will fall by 10% Goods: luxuries goods,manufactured goods, any goods which have many close substitues

2. INELASTIC (p<1)
P P2

P1
D

Q2 Q1

Qd

%P > %Qd i.g : if 3% increase in P of goods A leads to only 1% decrease in Qd. Goods: primary goods (paddy, rubber),necessities good & any goods which have less substitues

3. UNITARY ELASTIC (p=1)


P P2

P1

%P = %Qd i.g : when the P by 10% of a goods, th Qd will by 10%. Goods: no such product in this world
Qd

Q2

Q1

4. PERFECTLY INELASTIC (P=0)


%Qd=0 in P will have no effect on the Qd Goods: demand for insulin by serious diabetic patient
Qd

P P2

P1

Q1

5. PERFECTLY ELASTIC (p=)


P

P1

Q1

Q2

Qd

%P =0 The small in P will cause the Qd to zero. buyers can buy as much as they like at one P Goods: its hard to find such products

Elasticity of supply

1. ELASTIC (s>1)
P
S

P2 P1

Qs Q1 Q2

Flatter supply curve %P < %Qs i.g : if the producer the P by 1%, the Qs will more than 1%

2. INELASTIC (s<1)
P P2 S

steeper supply curve %P > %Qs i.g : P 1%,producer will Qs less than 1%.

P1

Q1 Q2

Qs

3. UNITARY ELASTIC (s=1)


P P2 S

%P = %Qs i.g : P by 1%, producer will Qs by 1%.

P1

Q1

Q2

Qs

4. PERFECTLY INELASTIC (s =0)


%Qs=0 when the P by 10%, Qs are still at the same amount, producer will not respond to the price change at all
Qs

P P2

P1

Q1

5. PERFECTLY ELASTIC (s=)


P

%P =0 there is no supply at all, unless the price level decrease.


S

P1

Q1

Q2

Qs

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