it’s impact in economics

8/14/2019 Its Impact in Economics

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ElasticityElasticity

Its impact in economicsIts impact in economics


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IntroductionIntroduction

Do you think the demand and supplyDo you think the demand and supplyfor every product change at thefor every product change at thesame rate?same rate?

If prices of potato chips andIf prices of potato chips andcigarettes rise by the samecigarettes rise by the same

percentage, which products quantitypercentage, which products quantitydemanded will be hurt more?demanded will be hurt more?

The reason for this is that productsThe reason for this is that productssu l and demand exhibit asu l and demand exhibit a


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ElasticityElasticity

The responsivenessThe responsiveness

of quantitiesof quantitiesdemanded ansdemanded ans

supplied to changessupplied to changesin pricein price


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Price Elasticity ofPrice Elasticity of

DemandDemand

Coefficient of

demand elasticity =% change in quantity

Demanded /% change in Price

= E d = Q / Pd d


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About the changeAbout the change

The effect of the change is in theThe effect of the change is in the

numerator of the equationnumerator of the equation

The cause of the change is in theThe cause of the change is in the

denominatordenominator


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ExampleExample

Toy storeToy store

Sells Teddy Bears for $20Sells Teddy Bears for $20

Quantity demanded is 100Quantity demanded is 100 Store raises price to $25Store raises price to $25

Quantity demanded decreases to 50Quantity demanded decreases to 50

What is the price elasticity ofWhat is the price elasticity ofdemand?demand?


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SolutionSolution

% change in quantity demanded / % change in price% change in quantity demanded / % change in price

= ((Qn Qo)/ (Qn+Qo)/2) / ((Pn Po)/(Pn+Po)/2)= ((Qn Qo)/ (Qn+Qo)/2) / ((Pn Po)/(Pn+Po)/2)

= ((50 100)/(150/2)) / ((25 20) /(45/2))= ((50 100)/(150/2)) / ((25 20) /(45/2))

= (50/75) / (5/22.5)= (50/75) / (5/22.5)= .67/.22= .67/.22

= 3.045= 3.045


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ResultsResults

The coefficient will signify whetherThe coefficient will signify whether

the demand between the points wasthe demand between the points was

Elastic = >1Elastic = >1

Unitary Elasticity = 1Unitary Elasticity = 1

Inelastic


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Elasticity typesElasticity types

Elastic coefficient:Elastic coefficient:

A % change in price results in aA % change in price results in a largerlarger %%change in Quantity Demandedchange in Quantity Demanded

Unitary elastic coefficient:Unitary elastic coefficient:

A % change in price results in anA % change in price results in an equalequal %%change in Quantity Demandedchange in Quantity Demanded

Inelastic coefficient:Inelastic coefficient:

A % change in price results in aA % change in price results in a smallersmaller %%change in Quantity Demandedchange in Quantity Demanded


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Others to considerOthers to consider

0 = Perfect inelasticity0 = Perfect inelasticity

Infinity = Perfect elasticityInfinity = Perfect elasticity

Elastic Unitary Inelastic

Perfect Elastic Perfect Inelastic


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The Total RevenueThe Total Revenue

ApproachApproach Businesses must try to figure out if aBusinesses must try to figure out if a

change in price will result in greaterchange in price will result in greater

revenuerevenue

Revenue = price X quantityRevenue = price X quantity

In the previous example, was theIn the previous example, was the

price change a good move?price change a good move?


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ResultResult

Old revenueOld revenue

= $20 X 100 bears= $20 X 100 bears

= $2000= $2000

New RevenueNew Revenue

= $25 X 50= $25 X 50

= $1250= $1250

Therefore the price change resulted in lostTherefore the price change resulted in lostrevenues bad moverevenues bad move


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General RuleGeneral Rule

Goods withGoods with inelastic demandinelastic demandcoefficients: When price rises, totalcoefficients: When price rises, totalrevenues rise. When price falls, totalrevenues rise. When price falls, totalrevenues fallrevenues fall

Goods withGoods with elastic demandelastic demand coefficients:coefficients:When price rises, total revenues fall.When price rises, total revenues fall.

When price falls, total revenues riseWhen price falls, total revenues rise

Goods withGoods with unitary demandunitary demand coefficients:coefficients:

When price rises of falls, toal revenueWhen price rises of falls, toal revenue

stays the samestays the same


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Factors affecting DemandFactors affecting Demand

ElasticityElasticity Availability of SubstitutesAvailability of Substitutes

The more subsitutes, the more elastic the demandThe more subsitutes, the more elastic the demand

Nature of the itemNature of the item

Goods that are neccesities tend to be more inelasticGoods that are neccesities tend to be more inelastic

Fraction of income spent on the itemFraction of income spent on the item More expensive goods tend to be more elasticMore expensive goods tend to be more elastic

Amount of time availableAmount of time available The more time to make a purchase, the more elasticThe more time to make a purchase, the more elasticthey may becomethey may become

These are not absolutes, why?These are not absolutes, why?


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To completeTo complete

Check your UnderstandingCheck your Understanding

Pg.97Pg.97

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Elasticity of SupplyElasticity of Supply

Similar to demandSimilar to demand

Coefficient of

supply elasticity =% change in quantity

Supplied/% change in Price

= E s = Q / Ps s


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ExampleExample

Toy storeToy store

Sells Teddy Bears for $20Sells Teddy Bears for $20

Quantity supplied is 100Quantity supplied is 100 Store raises price to $25Store raises price to $25

Quantity supplied increases to 105Quantity supplied increases to 105

What is the price elasticity of supply?What is the price elasticity of supply?


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SolutionSolution

% change in quantity supplied / % change in price% change in quantity supplied / % change in price

= ((Qn Qo)/ (Qn+Qo)/2) / ((Pn Po)/(Pn+Po)/2)= ((Qn Qo)/ (Qn+Qo)/2) / ((Pn Po)/(Pn+Po)/2)

= ((105 100)/(205/2)) / ((25 20) / (45/2))= ((105 100)/(205/2)) / ((25 20) / (45/2))

= (5/102.5) / (5/22.5)= (5/102.5) / (5/22.5)

= .05/.22= .05/.22

= .227= .227


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Elasticity typesElasticity types

Elastic coefficient:Elastic coefficient: A % change in price results in aA % change in price results in a largerlarger %%

change in Quantity Suppliedchange in Quantity Supplied

Unitary elastic coefficient:Unitary elastic coefficient: A % change in price results in anA % change in price results in an equalequal %%


Inelastic coefficient:Inelastic coefficient: A % change in price results in aA % change in price results in a smallersmaller %%



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Factors affecting SupplyFactors affecting Supply

ElasticityElasticityTimeTime

The longer a time period a seller has toThe longer a time period a seller has toincrease production, the more elasticincrease production, the more elastic

the supply will bethe supply will be Ease of StorageEase of Storage

If product can be stored, supplyIf product can be stored, supplybecomes more elasticbecomes more elastic

CostCost Some products are difficult to increaseSome products are difficult to increase

the supply of quickly, such as cars andthe supply of quickly, such as cars and

homeshomes


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Others to considerOthers to consider

0 = Perfect inelasticity0 = Perfect inelasticity

Infinity = Perfect elasticityInfinity = Perfect elasticity

Elastic Unitary Inelastic

Perfect Elastic Perfect Inelastic


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Check YourCheck Your

UnderstandingUnderstanding Pg. 101Pg. 101

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it’s impact in economics

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