market economy part 2
TRANSCRIPT
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Elasticity
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Prepared by; RASHAIN PERERA077 059 37 [email protected]
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What is elasticity?
Elasticity is the responsiveness of the dependent variable to the changes of the independent variable.
Elasticity simply refers to; Responsiveness Response
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Methods of measuring elasticity Percentage method Point method Arc method
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Point method
This measures the elasticity at a specific point on the curve
Weaknesses of using point method are; Coefficient takes 2 different values for the
same given change in quantity demand and price though slope is constant at every place.
Due to this weakness this method is not used in practice to make economic decisions
Arc elasticity is used to avoid this problem.5
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Arc method
This calculates the average responsiveness of quantity demand over some portion on the curve. (Along the curve)
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Types of elasticities
Price elasticity Price elasticity of demand Price elasticity of supply
Cross price elasticity of demand Income elasticity of demand
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Price elasticity of demand
Definition; Price elasticity of demand measures the responsiveness of quantity demand following a change in the price. In other words it is the percentage change in the quantity demanded of a product that results from 1% change in the price of the same product.
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b=
x
x
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Types of price elasticities of demand Perfectly elastic demand Elastic demand Unitary elastic demand Inelastic demand Perfectly inelastic demand
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Perfectly elastic demand
Price Quantity demand100100
10002000
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Price
Quantity
PED = α
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Elastic demand
Price Quantity demand100110
1000500
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Price
Quantity
PED = α - 1
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Unitary elastic demandPrice Quantity demand124
1005025
13
Price
Quantity
PED = 1
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Inelastic demand
Price Quantity demand100200
1000900
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Price
Quantity
PED = 1 - 0
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Perfectly inelastic demandPrice Quantity demand100200
10001000
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Price
Quantity
PED = 0
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Uses of price elasticity of demand To the government to take
practical decisions and to make economic policies, tax rates and tax revenue.
To analyze market situations Helps businessmen
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Determinants of price elasticity of demand
substitutability More substitutes-elastic less substitutes-inelastic
definition of the good broadly defined-inelastic narrowly defined-elastic
habit forming or not habit forming-inelastic non-habit forming-elastic
income portion that is allocated on the product high income portion-elastic low income portion-inelastic
number of uses or benefits of the product more uses-inelastic less uses-elastic 17
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Relationship between price elasticity of demand, producer revenue and consumer expenditure Consumer expenditure= price x quantity
bought Producer revenue= price x quantity sold
Therefore producer revenue = consumer expenditure
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Effect on CE/PR
When price decrease
When price increase
Inelastic demand Decrease IncreaseElastic demand Increase Decrease Unitary elastic demand
No change No change
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Price elasticity of supply
Definitions; Price elasticity of supply measures the responsiveness of quantity supplied that results in 1% change in price of the concerned product.
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b=
x
x
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Types of price elasticities of supply Perfectly elastic supply Elastic supply Unitary elastic supply Inelastic supply Perfectly inelastic supply
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Perfectly elastic supplyPrice Quantity supplied100100
10002000
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Price
Quantity
PES = α
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Elastic supplyPrice Quantity supplied100110
10002000
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Price
Quantity
PES = α - 1
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Unitary elastic supplyPrice Quantity supplied102030
100200300
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Price
Quantity
PES = 1
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Inelastic supplyPrice Quantity supplied100200
10001100
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Price
Quantity
PES = 1 - 0
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Perfectly inelastic supplyPrice Quantity supplied100200
10001000
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Price
Quantity
PES = 0
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Determinants of elasticity of supply; Perishability
High –elastic Low -inelastic
Time taken for production High –inelastic Low -elastic
Factor mobility High –elastic Low -inelastic
Flexibility of the production process High –elastic Low -inelastic
Uses of the product More –inelastic Less -elastic 28
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Cross price elasticity of demand Definitions; Cross price elasticity of
demand measures the responsiveness of quantity demand following a change in the price of other products. Normally we measure this only for demand
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C b=
Cx
Cx
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CED
POSITIVE-SUB
CED>1 CLOSE SUB
CED<1 REMOTE SUB
NEGATIVE-COM
ZERO-NON RELATED
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Uses of cross price elasticity of demand To identify the inter relationship
between the products For the preparation of economic
policies To determine the degree of
monopoly powers
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Income elasticity of demand Definitions; YED measures the
responsiveness of the quantity demand of a product following a change in the income of people.
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Y b=
Yx
Yx
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YED
POSITIVE-NORMAL
YED>1 LUXURY
YED<1 ESSENTIAL
NEGATIVE-INFERIOR
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