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Chapter 11 - Elasticity

This document defines key concepts related to elasticity, including: - Price elasticity of demand measures responsiveness of quantity demanded to price changes. - Degrees of elasticity (inelastic, unitary, elastic) describe responsiveness. - Factors like substitutes and income affect price elasticity. - Income elasticity measures responsiveness of demand to income changes. - Cross elasticity measures responsiveness of one good's demand to another's price. - Price elasticity of supply measures responsiveness of quantity supplied to price changes. - Degrees of supply elasticity also include inelastic, unitary, and elastic responses.

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Asher Smith
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41 views23 pages

Chapter 11 - Elasticity

This document defines key concepts related to elasticity, including: - Price elasticity of demand measures responsiveness of quantity demanded to price changes. - Degrees of elasticity (inelastic, unitary, elastic) describe responsiveness. - Factors like substitutes and income affect price elasticity. - Income elasticity measures responsiveness of demand to income changes. - Cross elasticity measures responsiveness of one good's demand to another's price. - Price elasticity of supply measures responsiveness of quantity supplied to price changes. - Degrees of supply elasticity also include inelastic, unitary, and elastic responses.

Uploaded by

Asher Smith
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 11 - Elasticity

Prepared and Present by Miss S. Brown


Objectives

• Define and explain ‘price elasticity of demand’


• Calculate price elasticity of demand
• Illustrate, by graphs, the degree of elasticity of demand
• Explain the factors affecting price elasticity of demand
• Explain ‘income elasticity of demand
• Explain cross elasticity of demand
• Explain price elasticity of supply
• Calculate income elasticity of demand, cross elasticity of demand and price
elasticity of supply
• Illustrate, by graphs, the degrees of elasticity of supply
Concept Map

Elasticity Measure the responsiveness of

Price elasticity of demand Quantity demanded to a change in price

Price elasticity of demand Quantity demanded to a change in income

Quantity demanded to a change in price


Price elasticity of demand
of another good

Price elasticity of supply Quantity supplied to a change in price


Price Elasticity of Demand

Price elasticity of demand (PED) measures the responsiveness of


quantity demanded to a change in the price of the good.
Formula Price Elasticity of Demand (PED)

Percentage change in quantity demanded Qd


Percentage change in price

Change in quantity demanded is:


new quantity demanded original quantity demanded

Percentage change in quantity demanded is


Change in Qd 100 100
Original Qd
Formula Price Elasticity of Demand (PED)

New price – Original price


The percentage change in price is:
Change in Qd
100
Original Qd

The price elasticity of demand coefficient will always be negative


once there is negative or inverse relationship between price and
quantity demanded.
Degrees of Elasticity

The degree of elasticity describes how responsive quantity


demanded is to a change in price. It is the range of possible
elasticity of demand coefficient for a good or service.

If quantity demanded is very responsive to a change in price,


quantity demanded is elastic.

If quantity demanded is very unresponsive to change in price,


quantity demanded is inelastic.
Degrees of Elasticity

Degrees of Elasticity Elasticity of Demand


of Demand Meaning Coefficient
• Perfectly inelastic • The percentage • PED = 0
change in quantity
demanded is zero.
Quantity demanded
does not respond to a
change in price.
• Fairly inelastic • 0 < PED < 1
• The percentage
change in quantity
demanded is less than
the percentage
change in price.
Degrees of Elasticity
Degrees of Elasticity Elasticity of Demand
of Demand Meaning Coefficient
• Unitary elastic • The percentage change in • PED = 1
quantity demanded is equal
to the percentage change in
price.
• Fairly elastic • The percentage change in • 1 < PED < infinity
quantity demanded is
greater than the
percentage change in price.
• Perfectly elastic • Quantity demanded changes • PED = infinity
when is no change in price
Perfectly Inelastic Demand

Price D
p1

0 Q quantity demanded
Fairly Inelastic Demand

Price D
p1

0 Q1 Q quantity demanded
Unitary elasticity Demand

Price
p1

p
D

0 Q1 Q quantity demanded
Fairly Elastic Demand

Price

p1
p

D
0 Q1 Q quantity demanded
Perfectly Elastic Demand

Price

p D

0 Q1 Q quantity demanded
Factors Affecting the Price Elasticity of
Demand

• Price of the good


• Number and closeness of substitute for the commodity
• Price of the commodity as a percentage of total expenditure
• Adjustment times
• Habit
• The degree of necessary of the good
• The number of uses of the good
• The definition of the good
Income Elasticity of Demand

Income elasticity of demand (YED) measures the responsiveness of


quantity demand to a change in income. The formula for income
elasticity of demand is:

YED = Percentage change in Qd


Percentage change in Income
Income Elasticity of Demand

As income changes, demand will change. Income elasticity of


demand measures whether demand is responsive or not very
responsive to change in income.

Goods with a positive income elasticity of demand coefficient are


normal goods. Normal good are goods the demand for which
increases as income increases, and vice versa.
Cross Elasticity of Demand

Cross elasticity of demand (XED) measures the responsive of quantity


demanded of one good to a change in the price of another good.

XED = Percentage change in Qd of good X


Percentage change in the price of good Y

Sometimes demand for a good might change not because of a change


in the price of the good, but because there are changes in the price of
another good
Price Elasticity of Supply

Price elasticity of supply (PES) measure the responsiveness of quantity supplied to


a change in price of the good.

PES = Percentage change in quantity supplied


Percentage change in price

When the price of a good increases, ceteris paribus, quantity supplied will
increase. When the price a good fall, ceteris paribus, quantity supplied. This is the
direct or positive relationship between price and quantity supplied. Price elasticity
of supply measures how responsive quantity supplied is to changes in price.
Degrees of Elasticity of Supply
Degrees of Elasticity Elasticity of supply
of Supply Meaning coefficient
• Perfectly • The percentage change in • PES = 0
inelastic quantity supplied in zero.
Quantity supplied does
not respond to a change
in price.
• Fairly • The percentage change in • 0 < PES < 1
inelastic quantity supplied is less
than the percentage
change in price
Degrees of Elasticity of Supply
Degrees of Elasticity Elasticity of supply
of Supply Meaning coefficient
• Unitary • The percentage change on • PES = 1
elasticity quantity supplied is equal to
the percentage change in
price.
• Fairly elastic • The percentage change in • 0 < PES < infinity
quantity supplied is greater
than the percentage change
in price.
• PES = infinity
• Perfectly • Quantity supplied changes
elastic when there is no change in
price
Degrees of Elasticity

Price 1 4

3 3 2

5
Degrees of Elasticity

• Perfectly vertical supply curve has a price elasticity of demand of zero,


perfectly inelastic - curve 1
• If the supply curve starts from the quantity axis, price elasticity if
supply is inelastic – curve 2
• Any supply curve that starts from the origin has a unitary price elasticity
of supply – curve 3
• If the supply curve starts from the price axis, price elasticity of supply is
elastic – curve 4
• A perfectly horizontal supply curve has a price elasticity of supply of
infinity perfectly elastic – curve 5

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