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ELASTICITIES

PL2151 Pengantar Ekonomika


By : SHR

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Price Elasticity of Demand

• Price elasticity : measure how responsive the quantity demanded is


to a change in price

• Price elasticity : the percentage change in the quantity demanded of


a good that results from a 1 percent change in its price

• Ep = Percentage change in quantity demanded


Percentage change in price

• Ep = %∆Q = ΔQ/Q = ΔQ . P
%∆P ΔP/P ΔP Q

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Price Elasticity Interpretation

Ep Terminology Interpretation
|Ep| = 0 Perfectly Inelastic The amount of goods demanded
does not change with the change of
price
0 < |Ep| < 1 Inelastic The amount of goods demanded
change with smaller percentage
than percentage of price
|Ep| = 1 Unit Elastic The amount of goods demanded
changes with the same percentage
of price
|Ep| > 1 Elastic The amount of goods demanded
change with a greater percentage
than percentage of price 3
Income Elasticity of Demand

• Income elasticity : measure how responsive the quantity demanded


is to a change in income

• Income elasticity : the percentage by which a good’s quantity


demanded changes in response to a 1 percent change in income

• EI = Percentage change in quantity demanded


Percentage change in income

• EI = %∆Q = ΔQ/Q = ΔQ . I
%∆I ΔI/I ΔI Q

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Income Elasticity Interpretation

EI Terminology Interpretation
EI > 0 Normal The amount of goods
demanded increase with
increasing incomes
EI < 0 Inferior The amount of goods
demanded decreases with
increasing income

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Cross Elasticity of Demand
• Cross elasticity : measure how responsive the quantity demanded
of the first good is to a change in price of the second

• Cross elasticity : the percentage by which the quantity demanded


of the first good change in response to a 1 percent change in the
price of the second

• EC = Percentage change in quantity demanded for good i


Percentage change in price of good j

• EC = %∆Qi = ΔQi/Qi = ΔQi . Pj


%∆Pj ΔPj/Pj ΔPj Qi

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Cross Elasticity Interpretation

EC Terminology Intrepretation
EC > 0 Substitutes The amount of goods i
demanded increase with
increasing price of goods j
EC < 0 Complements The amount of goods i
demanded decrease with
increasing price of goods j

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Price Elasticity of Supply
• Price elasticity of supply : measure how responsive the quantity
supplied is to a change in price

• Price elasticity of supply: the percentage change in the quantity


supplied that occurs in response to a 1 percent change in its price

• Ep = Percentage change in quantity supplied


Percentage change in price

• Ep = %∆Q = ΔQ/Q = ΔQ . P
%∆P ΔP/P ΔP Q

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Exercise 1
The US Department of Agriculture (USDA) has been concerned that American aren’t eating
enought fruits and vegetbles, and they have considered coupons and other subsidies to
encourage people to eat these healthier foods. The price elasticities of demand for each fruit
are as follows:
Fruit Price Elasticities of Demand
Apple -0.16
Banana -0.42
Grapefruit -1.02
Grapes -0.91
Orange -1.14

1. Based on these Price Elasticities of Demand, which fruit is most inelastically demanded?
Which is most elastically demanded?
2. For which of these fruit would a 10% drop in price cause an increase in total revenue
from the sale of that fruit?
3. If government could offer “10% off” coupons for only three of these fruits, and wanted
to have the biggest possible effect on quantity demanded, which three fruits should get
the coupons?
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4. Overall, the authors found that for the average fruit, the elasticity of demand was about
-0.5. Is the demand elastic or inelastic?
Exercise 2
Supply of wheat : QS = 1800 + 240 P
Demand for wheat : QD = 3550 – 266 P

1. Find the equilibrium point P* and Q*


Calculate on the equilibrium point :
2. Price elasticity of demand
3. Price elasticity of supply

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