ELASTISITAS

MICROECONOMIC

A.SUMARTO EKA PUTRA

Directorate General Of TreasuryHuman Reosurce Division

ELASTISITAS

Sumarto Eka Putra, Presentasi Microeconomic @2010

BEFORE CONTINUE......

• Understanding Demand and Supply• Determinant Factor of Demand and

Supply• Understanding Demand and Supply Curve• Relationship Between Demand and supply


What is Elasticity?

• Measure the reaction or responsiveness level of Quantity change to a change in price

• Elasticity of Demand and Elasticiy of Supply

• Other Elasticity• Cross elasticity of Demand


Price Elasticity of Demand

• Defining price elasticity of demand (PeD)

responsiveness of quantity demanded to a change in price

PeD = % change in quantity demanded in response to a 1 % change in price


Pri

ce

O Q1 Q2

P2

P1

a

S1

S2

D

b

Market Supply and Demand

Quantity


Pri

ce

O Q3Q1 Q2

P2

P1

P3

c

S1

S2

D

D'b

a

Quantity

Market Supply and Demand



• Measuring price elasticity of demand %QD / %P

– use of percentage measures

– the sign: positive or negative?

– the value: greater or less than 1?



– PeD >1: Elastic demand

– PeD <1: Inelastic demand

– P e D =1: Unit elastic demand


Information of Goods

Goods Unit Initial Price New Price

Cheese Per kg 1.700 1.500

Shirt Per piece 8.100 7.900

Radio Perunit 40.100 39.900



Can u measure the Elasticity?????



Goods Unit Initial Price

New Price

Average Price

Initial Quantity

New Quantity

Average Quantity

Cheese Per kg 1.700 1.500 1.600 116.250 123.750 120.000

Shirt Per piece

8.100 7.900 8.000 197.500 202.500 200.000

Radio Perunit 40.100 39.900 40.000 9.950 10.050 10.000

Goods Percentage of Price Fall

Percentage of Quantity Rise

Elasticity of Demand

Cheese 12,5 6,25 0,5

Shirt 2,5 2,5 1,0

Radio 0,5 1,0 2,0


0

2

4

6

8

10

0 10 20 30 40 50

P ($) DQ DPmid Q mid P

¸Ped =

Demand

m

n

Q = 10

P = –2

Mid P

7

Mid Q15

Measuring Elasticity


0 10 20 30 40 500

2

4

6

8

10 DQ DP

mid Q mid P¸Ped =

10 -2 15 7

¸=

= 10/15 x -7/2

= -70/30

= -7/3 = -2.33

Demand

m

n

Q = 10

P = –2

Mid P

7

Mid Q15

Measuring Elasticity

P ($)



• Determinants of price elasticity of demand

– number and closeness of substitute goods

– proportion of income spent on the good

– the time period


Price Elasticity of Demand andTotal Consumer Expenditure

• Defining total consumer expenditure

TE = P × Q

• Illustrating TE graphically


Consumers’ total expenditure =

firms’ total revenue=

$2 x 3m = $6m

Consumers’ total expenditure =

firms’ total revenue=

$2 x 3m = $6m

P($)

Q

D

0

1

2

3

4

0 1 2 3 4 5

Total Expenditure


Price Elasticity of Demand and Total Consumer Expenditure

• Effects of a price change: elastic demandP rises: TE falls

P falls: TE rises


0

aD

Expenditure fallsas price rises

4

20

5

10

b

Elastic Demand Between Two Points

P($)

Q

Expenditure risesas price falls



• Effects of price change: inelastic demandP rises: TE rises

P falls: TE falls


a4

200

D

Expenditure risesas price rises

8

15

c

Q

Inelastic Demand Between Two Points

P($)

Expenditure fallsas price falls



• Special casesPeD = 0: Totally inelastic demand

PeD = : Infinitely elastic demand


P2

P

QO Q1

P1

D

b

a

Totally Inelastic Demand (PÎD = 0)


Q2

P

QO Q1

P1 Da b

Infinitely Elastic Demand (PÎD = ¥)



• Special cases– PeD = 0: Totally inelastic demand

– PeD = : Infinitely elastic demand

– PeD = –1: Unit elastic demand


P

QO 40

20

D

100

8

a

Unit Elastic Demand (PÎD = -1)

b


Price Elasticity of Supply

• Meaning of price elasticity of supply

responsiveness of quantity supplied to a change in price

PeS = % change in quantity supplied in response to a 1 % change in price


P

Q O

P1

Q1

S2

S1

Supply Curves with Different Price Elasticity of Supply


P

Q O

P2

Q3

P1

Q1 Q2

S2

S1

Supply Curves with Different Price Elasticity of Supply



• Measuring price elasticity of supply

%QS / %P

elastic and inelastic supply



• Determinants of price elasticity of supply– amount that costs rise as output increases

• spare capacity or stocks of inventory• access to raw materials• ability to switch away from alternative products• avoidance of the need to pay overtime

– time period• immediate: very inelastic• short run: some responsiveness• long run: highly elastic


Other Elasticities• Income elasticity of demand

– measurement

%QD / %Y

– determinants• degree of necessity• rate at which people are satisfied• level of income

– normal goods; income elasticity positive– inferior goods; income elasticity negative– applications; marketing, planning, govt. policy


Normal Good

Barang yang Dibeli pada semua tingkat pendapatan yang tinggi dimana sebagian dari pendapatan itu dibelanjakan untuk barang ini, walaupun proporsinya cenderung menurun

Ex: Primary Goods

QI


Normal Good

I

Barang yang bersifat inelastis terhadap pendapatan setelah tingkat pendapatan

Ex: Electronic, Vehicles

QI


Inferior Goods

C

I I

Q

Barang yang tergolong kebutuhan pokok untuk tingkat pendapatan yang rendah, yang menjadi barang inferior untuk tingkat pendapatan setelah C

Ex: Electronic, Vehicles


Other Elasticities

• Cross-price elasticity of demand– measurement

%QD of good A / %P of good B

– determinants• closeness of substitute goods• closeness of complementary goods

– Applications; marketing, advertising


Markets and Adjustment Over Time

• Short-run and long-run adjustment– short-run and long-run supply curves


D1

D2

P1

Q1

P

Q O

a

Response of Supply to an Increase in Demand


D1

D2

S long-run

P1

P3

P2

Q1 Q2 Q3

P

Q O

b

c

S short-run

a

Response of Supply to an Increase in Demand


Markets and Adjustment over Time• Short-run and long-run adjustment

– short-run and long-run supply curves

– short-run and long-run demand curves


S1

P1

Q1

P

Q O

a

S2

Response of Demand to an Increase in Supply


S1

S2

D short-run

P1

P2

Q1 Q2

P

Q O

a

b



S1

S2

D short-run

D long-run

P1

P3

P2

Q1 Q2 Q3

P

Q O

a

b

c



Response of Demand to a Decrease in Supply

• What are the short run consequences for buyers of a rise in price?– Can they adjust?– What determines ability to adjust?– What is different in the longer term?– Draw diagrams to show short run and long

run demand responses to short supply and higher prices.


Markets and Adjustment over Time• Speculation

– stabilising speculation


P1

P2

P

Q O

S1

D1

D2

a

b

Stabilising Speculation: Initial Price Rise


P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

c

Stabilising Speculation: Initial Price Rise


P1

P2

P

Q O

D2

a

b

S1

D1

Stabilising Speculation: Initial Price Fall


S2

D3

P1

P2

P

Q O

P3

D2

a

b

c

S1

D1

Stabilising Speculation: Initial Price Fall


Markets and Adjustment over Time• Speculation

– stabilising speculation

– destabilising speculation


P1

P2

P

Q O

S1

D1

D2

a

b

Destabilising Speculation: Initial Price Rise


P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

c

Destabilising Speculation: Initial Price Rise


P1

P2

P

Q O

S1

D1

D2

a

b

Destabilising Speculation: Initial Price Fall


P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

c

Destabilising Speculation: Initial Price Fall


Markets and Adjustment over Time• Dealing with uncertainty and risk

– defining risk and uncertainty

• uncertainty = unexpected change = volatility = risk

– reducing risks by holding stocks

– a market in information

• Information is valuable, will be paid for

• Market research, predictions,


Markets Where Prices are Controlled

• Minimum (high) price - price floor– Justification

• price stabilisation, industry support

– effect: surplus


P

Q O

Pe

minimumprice

Qd Qs

S

D

surplus

Minimum Price: Price Floor



– consequences• dealing with resulting surpluses• cushion inefficiency• discourage production of more efficient

alternative products• higher prices for consumers

– eg: Common Agricultural Policy (EU); OPEC



• Maximum (low) price – price ceiling– Justification

• Social welfare, prevent abuse of monopoly power

– effect: shortage


P

Q O

Pe

S

D

Qs Qd

maximumprice

shortage

Minimum Price: Price Ceiling



– consequences• dealing with resulting shortages• preferential treatment to particular customers• rationing• black markets

ELASTISITAS

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