bus 1000p lec 4 elasticity 1112(1)

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• 8/2/2019 BUS 1000P Lec 4 Elasticity 1112(1)

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THE MARKET (contd)

ELASTICITIES

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` P

D

x D

x Q

` P

D

` D

x Q

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` P

` D

` D

x Q

` P

` D

x D

x Q

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` Do you always change how much you buy?

` Or does it depend?

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` If the price rises, you buy less.

` If the price rises, you buy the same.

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` If the price falls, you buy more.

` If the price falls, you buy the same.

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` Low price elasticity` High price elasticity

P

Q

D

D

P

Q

D

D

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` Two Demand Curves/Schedules - in each case,

the quantity demanded rises, as price falls but

the relationship between price and quantity differs

between the two the SLOPE of the twoschedules is different.

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` This measures the responsiveness of quantity

demanded to a change in price.

` It is calculated using a formula ` PED = % change in quantity demanded

% change in price

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` Demand is PRICE ELASTIC when PED is greater than1. In this case, a percentage change in price will lead toan even larger percentage change in quantity.

` Demand is price INELASTIC when PED is less than 1. In

this case, a percentage change in price will lead to asmaller percentage change in quantity demanded.

` Demand is said to be of UNITARY ELASTICITY whenPED is 1. In this case, a percentage change in price willlead to an equal, and opposite, percentage change in

quantity demanded.

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` Price Elasticity of Demand varies between

products because -

` the availability of substitutes - the better the

substitute, the higher the Price Elasticity ofDemand for a product.

` Habit - how easy is it for people to change from

one product to another.

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` The proportion of income spent on the product.

` Absolute price level.

` A necessity?

` Time.

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` Think of something you would buy more of.

would stay the same.

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` What might you cut back on?

` What might you carry on buying in more or less

the same quantities?

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` This measures the responsiveness of quantitydemanded to a change in income.

`

IED

= % change in quantity demanded% change in income

IED is normally positive ie quantity

demanded rises, as income rises.

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` Income Elasticity of Demand (IED) variesbetween products because -

` luxuries (holidays) will tend to have a high IED,whereas necessities (milk) will have a low IED.

` For some products, the IED is negative - inferiorgoods (bus travel; cheap cuts of meat).

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` This measures the responsiveness of the

quantity demanded of one good (A) to a

change in the price on another good (B).

` CED= % change in quantity demanded of good A

% change in price of good B

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` Two goods which are substitutes for each other

will have positive CED an increase in the price

of one will lead to an increase in demand for the

other.` Two goods which are complements will have a

negative CED an increase in the price of one will

lead to a fall in demand for the other.

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` Substitutes? (apples and pears).

` Complements? (petrol and cars).

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` This measures the responsiveness of quantitysupplied to a change in price..

` PES = % change in quantity supplied` % change in price.

` PES may range from zero (no response insupply to a change in price, perfectly inelastic);

to between zero and one (less thanproportionate response, inelastic); to one toinfinity (marked response in supply, elastic).

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` What determines it?

` - how easy is it to switch resources?

` - how much time is there?

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` P P s

`

S

` sS

Q Q

Price Elastic SS Price Inelastic SS

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` Price of a newspaper = 50p

` Total sales = 100,000

` Total revenue = 50,000

` Price increases to 60p

` Total sales = 70,000

` Total revenue = 42,000

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` PED = % change in quantity demanded

` % change in price

` = - 30% = 1.50 = elastic.

` + 20%