Chapter 3 - For Student

8/8/2019 Chapter 3 - For Student

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ELASTICITY

Contents

Elasticity of demand

Elasticity of supply


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*Price elasticity of demand (EDP)

*Income elasticity of demand (EDI)

*Cross elasticity of demand (EDPy)


Price elasticity of demand (EPD)

- The percentage changed in quantity demandedresulting from 1% change in price

-

P

QE

D

P

=

%

%


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Elasticity of demandPrice elasticity of demand (EP

D) Point elasticity

E.g: Demand curve: P = 18 2Q and point A (P=6, Q=6)

What is price elasticity of demand at point A

P

P

Q

Q = :

Q

PQ

Q

P

P

QP .'. )(=

=

P

QE

D

P

=

%

%

EDP= -1/2 . 6/6= -1/2

Conclusion:

-

-


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D)

Arc elasticity

Eg: At price P=7.000VND, consumer buys 10kilos of pork/month. At price P= 6.000 VND, consumer buys 15kilos/ month.

What is price elasticity of demand?

2

2

21

21

21

21

PP

PP

QQ

QQ

ED

PAB

+

+

=


Conclusion: Price elasticity of demand always:

- Unit free and negative value

- Usually use absolute value


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Price elasticity of demand(EP

D)

/E/ < 1: Inelastic demand - steep demand curve

- large change in price, smallchange in quantity demanded

- Consumers are not very sensitive

to the change in price- the goods is hard to replace

or necessity

P

Q


D)

/E/ > 1: Elastic demand, - flat demand curve

- small change in price, largechange in quantity demanded

- Consumers are very sensitiveto the change in price

- the goods is easy to replace

P

Q


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D)

/E/ = 1: Unitary-elastic demand

- slope down demand curve

- %change in price equal to %change in quantity demanded


D)

/E/ = 0: Perfectly Inelastic demand - Demand curve is parallel to the

vertical axis

- Change in price doesnt affecton quantity demanded

- Consumers are not sensitive

to the change in price- The good is irreplaceable

P

Q


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/E/ = : Perfectly elastic demand

- Demand curve is parallel to thehorizontal axis

- Change in price affects totally onquantity demanded

- Consumers are perfectly sensitive to

the change in price- The good is in the perfectcompetition market



Factors effecting on EP

D

- The availability of substitutes goods

- The characteristic of the goods

-

The time needed to find out the substitutes goods- The ratio of the spending in total income


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The relationship between

EPD, P and TR

/E/1: TR when P


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The relationshipbetween EP

D, P and TR

E1

P

P

TR

TR

TR

TR


Income elasticity of demand (EID)

- The percentage changed in quantity demandedresulting from 1% change in income

-

- EID 0: Normal goods

- EID >1: Luxury goods

Q

IQ

I

QE

I

D

I.'

%

%)(=

=


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Elasticity of demandCross-elasticity of demand (EPy

D)- The percentage changed in quantity demanded resulting from

1% change in price of related goods

EPyD > 0 : Substitutes goods

EPyD < 0 : Complements goods

EPy

D = 0 : Independent goods

-

Q

PQ

P

QE Y

P

Y

D

P YY.'

%

%=

=

Elasticity of supply

Price elasticity of supply (EPS)

- The percentage changed in quantity supplied resultingfrom 1% change in price

-

P

QE S

S

P

=

%

%


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Questions:1. If 10% increase in As price leads to 2% increase in total revenue,A is elastic demand

2. Decrease in gasolines price makes the demand curve of motorbikes(D1) shift to the right to (D2) and this (D2) is more elastic than (D1)at any quantity level (in absolute value)

3. All points in a demand curve has the same value of slope andprice elasticity of demand (point elasticity)

4. Food is less elastic demand than Kinh Do soft cake

5. Per-unit tax imposed on producer of good, which demand ismore elastic than supply will makes that producer bear thesmaller part in total tax amount in comparison with consumerspart.

Chapter 3 - For Student

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