Professional Documents
Culture Documents
7/23/2012
Definition
Elasticity measures the sensitivity of either demand or supply to a change in any of their determinants. Elasticity measures how responsive or unresponsive the quantity demanded (or supplied) is to changes in a given factor. Elasticity allows you to predict how a price change will affect the behavior of buyers or sellers.
2
7/23/2012
Types of Elasticity
Price elasticity of demand. Price elasticity of supply. Income elasticity of demand. Cross Price elasticity.
7/23/2012
Percent of consumers budget spent on item The smaller the percent, the more inelastic Nature of the good necessities more inelastic than non-necessities durable goods more elastic than for nondurable goods Length of time period over which elasticity is measured short run more inelastic than long-run
Availability of substitutes: Number and closeness of substitutes--more and closer means greater elasticity A related factor is how widely, or narrowly, a market is defined: Demand for food is much more inelastic than demand for cereal because of the relative number ofsubstitutes in each case Demand for a product is more
7/23/2012
Measures the response of the quantity demanded to a change in price. How responsive do you think is the quantity demanded of prescription drugs to a change in price? How responsive do you think is the quantity demanded of bananas to a change in price?
7/23/2012
ed =
es=
%Change in Price
7/23/2012
ed =
P2-P1/P1
Qs2- Qs1/Qs1
es=
P2-P1/P1
7/23/2012
2001 : PY
2002 CY
12
2003
20
7/23/2012
ed =
2-3/3
8/4
ed=
1/3
For every 1% inc. in Price, Qd dec. by 6.06% For every 1% dec. in Price, Qd inc. by 6.06%
7/23/2012
10
7/23/2012 11
epd =
7/23/2012
12
Perfectly Elastic
13
epd =
If the numerator (DQ%) is larger than the denominator (DP%) then epd is greater than one. A relatively small change in price causes a relatively large change in quantity demanded.
7/23/2012 14
Example
It has been observed that a 5% increase in the price, caused a 10% reduction in the quantity demanded.
epd = 10% / 5% = - 2
Elasticity of Demand is greater than one: Elastic
7/23/2012 15
epd =
If the numerator (DQ%) is smaller than the denominator (DP%), then epd is less than one. A relatively large change in price causes a relatively small change in quantity demanded.
7/23/2012 16
Example
It has been observed that a 20% decrease in the price of good X, caused a 5% increase in the quantity demanded of X.
ep = 5% / 20% = - 0.25
d
Elasticity of Demand is less than one: Inelastic
7/23/2012 17
|e| > 1
Midpoint
7/23/2012 18
When the elasticity is a very large number (close to infinity) demand is said to be 0.61 perfectly elastic. 0.6 A perfectly elastic demand would show that at the slightest increase in the price, the quantity demanded would drop to zero. 0 Units
|e| =
100 Units
19
7/23/2012
When the elasticity is a very small number 1.20 (close to zero) demand is said to be perfectly inelastic. A perfectly inelastic demand would show that even after a large 0.6 change in the price the quantity demanded would not change at all.
|e| = 0
100 Units
20
7/23/2012
7/23/2012
c)
d)
7/23/2012
7/23/2012
24
7/23/2012 25
TR =
TR = P x
Total Revenues Decrease. We can conclude that the rise in revenues due to Demand is higher prices, was Elastic completely offset by the drop in quantities sold.
Total Revenues Increase. We can conclude that the quantities sold did not drop enough to offset the Demand is rise in revenues due Inelastic to higher prices
27
7/23/2012
|e| = 1
If demand is UNIT elastic an increase/decrease in price would leave TR unchanged
28
Cross Elasticity
% change in Q to % change in price of some other good Measures closeness of substitutes and complements positive for substitute commodities negative for complements EX can be calculated
7/23/2012
Py1-Py0/(Py1+Py0)
29