chapter 3 elasticity
TRANSCRIPT
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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