chapter 3 elasticity

8/13/2019 Chapter 3 Elasticity

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PREPARED BY:

ROSMAH BT ABD GHANI @ ISMAIL

ELASTICITY


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CHAPTER OBJECTIVES

To explain the concept of elasticities.

To calculate elasticities of demand ( price, income

and cross).

ELASTICITY


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Topics to be covered

Definition

types of elasticity

How to calculate

Determinants

ELASTICITY


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ELASTICITY

DEMAND

PRICE CROSS INCOME

SUPPLY

PRICE

DEFINITION OF ELASTICITY:Measures the responsivenessof quantity

demanded or quantity supplieddue to a changes in

its determinants.

ELASTICITY


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ELASTICITY OF DEMAND

Measures the responsiveness/sensitivity of

quantity demanded due to the changes in itsdeterminants.

There are 3 types elasticity of demand:

1. Priceelasticity of demand

2. Incomeelasticity of demand

3. Crosselasticity of demand

ELASTICITY


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Measure the responsiveness of the quantity demanded due to the

change in its price.

Formula:

p = % in quantity demanded

% in price

PRICE ELASTICITY OF

DEMAND(p)ELASTICITY

Where :

Q2= New Quantity Demanded

Q1= Original Quantity Demanded

P1 = Original Price Level

P2 = New Price Level


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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 Q1=2000

P2= RM 30 Q2= 1000

3.

Indicates theve

(inverse) relationship

between P & Qd as

stated in the law ofdemand

so we must ignoreve

sign


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5 DEGREE OF PRICE

ELASTICITY OF DEMAND

ELASTICITY

Elasticity Degree Of Elasticity % Changes

p > 1 Elastic %P < %Q

p < 1 Inelastic %P > %Q

p =1 Unitary elastic %P = %Q

p = 0 Perfectly inelastic %Q= 0

p = Perfectly elastic %P=0


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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 luxury5. Consumption habit


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1. AVAILABILITY OF SUBTITUTES more substitutes-elastic demand

less substitutes-inelastic demand

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

Small proportioninelastic demand (consumers less

sensitive)

large proportion-elastic demand (consumer

sensitive)


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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


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ELASTICITY

CROSS ELASTICITY OF DEMAND

DEFINITION:

MEASURES OF THE RESPONSIVENESS/SENSITIVITYOF QUANTITY

DEMANDED FOR ONE PRODUCT (QDx) DUE TO A CHANGE INPRICE OF A RELATED PRODUCT ( Py)

Formula:

x = % in quantity demanded of good X

% in price of good Y


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ELASTICITY

Elasticity Interpretation

x = (+ve) substitute goods

x = (-ve) complementary goods

x = 0 Not related goods

CROSS ELASTICITY OF DEMAND

Relationship between goods


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ELASTICITY

INCOME ELASTICITY OF

DEMAND (Y )DEFINITION:

MEASURES THE SENSITIVITY/ RESPONSIVENESS

OF THE QUANTITY DEMANDED DUE TO A

CHANGE IN INCOME.

Formula:

Y = % in quantity demanded

% in income


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ELASTICITY

Elasticity interpretation Examples

y > 1 Luxury goods Diamonds, luxury cars

0< y < 1 Normal goods Shirt, shoes , pen

y =0 Necessities goods Rice, vegetables

y < 0 Inferior/ giffen goods Used car, low grade fruits

INCOME ELASTICITY OF

DEMAND (Y )

Types of goods


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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


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Elastic

P10%,Qd20%,TR10%vice versa.

GOOD: have many

substitute goods

P x Q = TR

Po :4 Qo: 20 =80

P1: 6 Q1: 10 =60

P


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inelastic

Q43

D

P

10

2

P10%, Qd5%, TR5%goods: less

substitutes,petrol

Less substitute goods

P x Q = TR

Po :2 Qo: 4 = 8

P1: 10 Q1: 3 = 30

P > Qd = TR

Q43

D

P

10

2

8

30


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Unitary elastic

Q43

D

P

4

3

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

P x Q = TR

Po :3 Qo: 4 = 12

P1: 4 Q1: 3 = 12

P = Qd = TR

constant

Q43

D

P

4

3

12

12


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Price elasticity of supply

Measure the responsiveness of the quantity supplied due to the

change in its price .

Formula:

s = % in quantity supplied

% in price

Where :

Q2= New Quantity Supplied

Q1= Original Quantity Supplied

P1 = Original Price Level

P2 = New Price Level


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5 DEGREE OF PRICE

ELASTICITY OF SUPPLY

ELASTICITY DEGREE OF ELASTICITY % CHANGES

s > 1 Elastic %P < %Q

s < 1 Inelastic %P > %Q

s =1 Unitary elastic %P = %Q

s = 0 Perfectly inelastic %Q= 0

s = Perfectly elastic %P=0


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Good % Qs decrease % P decrease s

A 200 160

B 15 140

C 0 160

D 100 100

1. Calculate price elasticity of supply

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 supplywhen the price increase.


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Determinants of price

elasticity of supply

Cost of production

Substitutability of inputs used

Period of production process

Time frame for supply

Degree of perishability


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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 processelastic SS

Long production processinelastic SS


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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


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THANK YOU


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1. ELASTIC (p>1)

P

D

Qd

P2

P1

Q2 Q1

%P < %Qd

i.g : if the price good A

by 5%, the Qd for goodsA will fall by 10%

Goods: luxuries

goods,manufactured

goods, any goods which

have many close

substitues


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2. INELASTIC (p %Qd

i.g : if 3% increase in

P of goods A leads toonly 1% decrease in Qd.

Goods: primary goods

(paddy,

rubber),necessities good& any goods which have

less substitues

P

D

Qd

P2

P1

Q2Q1


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3. UNITARY ELASTIC (p=1)

%P = %Qd

i.g : when the P by

10% of a goods, th Qdwill by 10%.

Goods: no such

product in this world

P

D

Qd

P2

P1

Q2 Q1


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4. PERFECTLY INELASTIC (P=0)

%Qd=0

in P will have no

effect on the QdGoods: demand for

insulin by serious

diabetic patient

P D

Qd

P2

P1

Q1


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5. PERFECTLY ELASTIC (p=)

%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

P

D

Qd

P1

Q2Q1


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Elasticity of

supply


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1. ELASTIC (s>1)

P

S

Qs

P2

P1

Q1 Q2

Flatter supply curve

%P < %Qs

i.g : if the producer

the P by 1%, the Qs will

more than 1%


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2. INELASTIC (s %Qs

i.g : P 1%,producerwill Qs less than 1%.

P S

Qs

P2

P1

Q1 Q2


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3. UNITARY ELASTIC (s=1)

%P = %Qs

i.g : P by 1%,

producer will Qs by1%.

PS

Qs

P2

P1

Q1 Q2


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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

P S

Qs

P2

P1

Q1


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5. PERFECTLY ELASTIC (s=)

%P =0

there is no supply at all,

unless the price leveldecrease.

P

S

Qs

P1

Q2Q1

chapter 3 elasticity

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