economics slides 2

8/9/2019 Economics Slides 2

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ElasticityElasticity

Price elasticity of demand:Price elasticity of demand:

The responsiveness of quantityThe responsiveness of quantity demanded to ademanded to a

change in pricechange in priceMeasurementMeasurement

Percentage (or proportionate) change in quantityPercentage (or proportionate) change in quantity

demanded divided by the percentage (or proportionate)demanded divided by the percentage (or proportionate)

change in pricechange in price

%%QQDD// %%PP..


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40% rise in the price of oil caused quantity40% rise in the price of oil caused quantity

demanded to fall by 10demanded to fall by 10%%

--10% / 40% =10% / 40% = --0.250.25 5% fall in the price of potato caused quantity5% fall in the price of potato caused quantity

demanded to rise by 15demanded to rise by 15%%

--15%

/15%

/--

5%

=5%

=--33


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Value ofElasticityValue ofElasticity

Elastic > 1Elastic > 1

Where quantity demanded change by a larger %ageWhere quantity demanded change by a larger %agethan pricethan price

Inelastic < 1Inelastic < 1 Where quantity demanded change by a smaller %ageWhere quantity demanded change by a smaller %age

than pricethan price

UnitElastic = 1UnitElastic = 1

Where quantity demanded change by a same %ageWhere quantity demanded change by a same %agethan pricethan price


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Special CasesSpecial Cases

Totally Inelastic DemandTotally Inelastic Demand

Infinitely Elastic DemandInfinitely Elastic Demand

Unit ElasticityDemandUnit ElasticityDemand


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Determinants ofprice ElasticityDeterminants ofprice Elasticity

The number and closeness of substitute goodsThe number and closeness of substitute goods

The proportion of income spent on good.The proportion of income spent on good.

The time period.The time period.


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Measurement ofElasticityMeasurement ofElasticity

ArcElasticityArcElasticity

ProportionateProportionate QQ// ProportionateProportionate PP

Price Elasticity ofDemandPrice Elasticity ofDemand

( Q( Q// Q )Q ) ( P( P // P )P )

PointElasticityPointElasticity

( Q( Q// P ) x (PP ) x (P //Q )Q )


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QQ// Q = 10 / 15Q = 10 / 15

PP // P =P = --2 / 72 / 710/1510/15 --2/7 =2/7 = --7/3 =7/3 = --2.332.33


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PointElasticityPointElasticity

The measurement of elasticity at a point on aThe measurement of elasticity at a point on a

curve.curve.

The formula for price elasticity of demand usingThe formula for price elasticity of demand usingpoint elasticity method is dQ/dPxP/Qpoint elasticity method is dQ/dPxP/Q

Where dQ/dP is the inverse of the slope of theWhere dQ/dP is the inverse of the slope of the

tangent to the demand curve at the point intangent to the demand curve at the point in

question.question.


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QQ// P x P/QP x P/QHow quantity demanded would react to anHow quantity demanded would react to an

infinitesimally small change in price.infinitesimally small change in price. Tangent to the Demand CurveTangent to the Demand Curve

Slope isSlope is --50/100. dP/dQ is50/100. dP/dQ is --50/10050/100

dQ/dP isdQ/dP is --100/50=100/50= --22

Elasticity =Elasticity = --2 x 30/40 =2 x 30/40 = --1.51.5


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Elasticity ofStraight Line DemandElasticity ofStraight Line Demand

CurveCurve dP/dQ is constantdP/dQ is constant

i.e. = 50/i.e. = 50/--10 =10 = --55

The value of P/QThe value of P/Q dQ/dP x P/Q =dQ/dP x P/Q = --5 x 8/10 =5 x 8/10 = --44

dQ/dP x P/Q =dQ/dP x P/Q = --5 x6/20 =5 x6/20 = --1.51.5


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Price Elasticity ofSupplyPrice Elasticity ofSupply

The responsiveness of quantity supplied to aThe responsiveness of quantity supplied to a

change in price.change in price.

FormulaFormula The percentage (or proportionate) change in quantityThe percentage (or proportionate) change in quantity

supplied divided by the percentage (orsupplied divided by the percentage (or

proportionate) change in price:proportionate) change in price: %Qs%Qs ++ PP


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PPs = (%Qss = (%Qs // P )P ) If 10% rise in price caused a 25% rise in theIf 10% rise in price caused a 25% rise in the

quantity supplied. Thenquantity supplied. Then 25% / 10% = 2.525% / 10% = 2.5

If 10% rise in price caused a 25% rise in theIf 10% rise in price caused a 25% rise in the

quantity supplied. Thenquantity supplied. Then5% / 10% = 0.55% / 10% = 0.5


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Income Elasticity ofDemandIncome Elasticity ofDemand

The responsiveness of demand to a change in consumerThe responsiveness of demand to a change in consumer

incomes.incomes.

Measurement:Measurement:

The percentage (or proportionate) change inThe percentage (or proportionate) change in

demand divided by the percentage (ordemand divided by the percentage (or

proportionate) change in income.proportionate) change in income.

YYDD = (%Q= (%QDD // Y )Y )


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If demand of butter rose 2 per cent when theIf demand of butter rose 2 per cent when theprice of margarine (a substitute) rose by 8 perprice of margarine (a substitute) rose by 8 percent, then the cross elasticity of demand forcent, then the cross elasticity of demand for

butter with respect to margarine would be:butter with respect to margarine would be:2% / 8% = 0.252% / 8% = 0.25

If good b is complementary to good a, asIf good b is complementary to good a, as

demand will fall as bs price rises. Cross elasticitydemand will fall as bs price rises. Cross elasticityof demand will be a negative figure.of demand will be a negative figure.


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The responsiveness of demand for one good toThe responsiveness of demand for one good to

a change in the price of another.a change in the price of another.

Formula:Formula:

The percentage (or proportionate) change inThe percentage (or proportionate) change in

demand for good a divided by the percentagedemand for good a divided by the percentage

(or proportionate) change in price of good b:(or proportionate) change in price of good b:

%%QQDa +%Da +%PPb.b.

CrossCross--Price Elasticity ofDemandPrice Elasticity ofDemand


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ElasticityAirElasticityAir

Charge higher price to business travelers.Charge higher price to business travelers.

Charge low enough price to leisure travelersCharge low enough price to leisure travelers

Bumper Harvest:Bumper Harvest:Demand for basic food products highlyDemand for basic food products highly

inelastic.inelastic.

economics slides 2

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